BusinessWeek.com, October 3, 2007, 3:57PM EST
As earnings take a nosedive, analysts expect to see more companies turn to M&A to pick up the slack. They certainly have the cash. by Steve Rosenbush
The slowdown in U.S. corporate profits has been swift and stunning. While earnings for companies in the Standard & Poor's 500-stock index grew a robust 14.7% in 2006, profit growth has screeched to a halt amid the troubled financial climate of 2007. With the income-reporting season kicking off the week of Oct. 8, average earnings for the S&P 500 companies are on track to grow just 1.9% during the third quarter, the slowest pace in more than five years, according to senior S&P index analyst Howard Silverblatt. That's down from 7.9% for the first quarter and 9.6% in the second. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)
The slowdown creates a dilemma for corporations, which face an imperative to "grow or die," Silverblatt says. How will they address their profit-growth problem? Many experts believe they will increasingly turn to mergers and acquisitions. "I don't think there's any question that growth will be harder to come by and that many companies will attempt to compensate for that by using M&A," says Hal Ritch, the former co-head of M&A at Citi (C); Donaldson, Lufkin & Jenrette; and Credit Suisse (CS), which acquired DLJ. He's now co-CEO of Sagent Advisors, an M&A advisory shop.
Ritch and other M&A advisers say they have detected a shift in their business during the last few months. The private equity firms that dominated M&A last year and during the first half of 2007 have been doing fewer deals of late. They are having a tougher time securing funding (BusinessWeek.com, 9/17/07).