What M&A Slowdown?

http://www.princeofwallstreet.com/2008/02/09/what…

There have been a number of articles recently saying that M&A in January was not as far down as the financial media has been claiming. MarketWatch’s David Weidner recently wrote, "that despite dire predictions of a M&A slowdown, the M&A rush that fueled the market’s outsized gains last year may not be slowing after all — and it could help soften the blow of a recession." The Prince would agree with his wishful thinking. He is also correct to mention that private equity firms are doing smaller deals and banks are less likely to cough up as much financing.

To make his case against an M&A slowdown he points to some deal statistics from the newly minted year. He basically shows that the combined value of completed global M&A in January is down 32 percent to $182 billion versus January 2007. However, he responds that announced M8A is so far strong in 2008. He bases this on the fact that the number of announced deals is up 8% to 2,381 globally, according to DealLogic. He doesn’t really mention the volume of deals but The Prince would suspect announced M&A volumes are down substantially.

So now that The Prince has laid some of the groundwork for this argument he wants to offer a little commentary of his own. The truth is there is no way this year is going to get up to the M&A volume of last year. Many claim that companies are so cheap now that strategic buyers and even some PE firms are going to be active buyers this year.

I think this argument is illusory. For one, sellers expectations take some time to adjust (just look at Yahoo’s board rejecting Microsoft’s bid as too low). Many sellers are going to be looking at where their stock prices were this summer and expecting to get that again in a sale. Sure, distressed companies are going to get snapped up and the number of distressed companies is sure to rise as many are unable to refinance their debt. PE firms do still have money to put to work and they are looking for targets. However, they are not going to pursue large scale buyouts until they can get leverage on the transactions at good terms. This seems like it will take a while to get fixed considering we probably have a un-issued debt backlog of $180-250bn on bank’s balance sheets globally. The average deal size in January fell by 17% which is completely attributable to PE being effectively on the sidelines and the unavailability of capital. Yes, PE has lots of cash and they are looking but they are not going to waste that case chasing deals that they can’t appropriately lever. Also, why would you buy companies when the economy is slowing, earnings are coming down, and seller expectations are still at Spring 2007 levels? Blackstone, KKR, and company are not that stupid. They will buy at the bottom but this isn’t it and even if it was the returns are terrible with no leverage.

Without the monster private equity transactions of last year we are not going to see M&A volumes go very high this year. For those that are predicting significantly lower bonuses for bankers in 2008, The Prince believes bonuses will be down. However, they will be down in the 10-20% range versus 2007 not in the 50%+ range many commentators are claiming. Remember that 2007 bonuses were effected by the terrible forward outlook plus a week 3rd and 4th quarters (usually banks base half of bonuses on past performance and half on forward outlook, with a wild card for paying more to keep people from defecting). 2008 bonuses will probably be dolled out when the forward outlook is fairly good. Yet, I have to emphasize my first point one more time. Without big private equity transactions this year M&A will not be the godsend to the economy that writers like Weidner claim it will be. Many in the financial press simply do not understand how much investment banking business was tied to the transactions related to sponsors and they also don’t appreciate how many companies were bid up by PE firms and put in play by activist hedge funds & PE shops. These forces will not be in the marketplace this year so long as the financing markets remain uncooperative.

http://www.princeofwallstreet.com/2008/02/09/what…

The Prince
http://www.princeofwallstreet.com