Wednesday, July 15, 2009

The M&A Confidence Game: No Bottom In Sight Yet

WSJ Deal Journal blog, July 14, 2009, 3:30 PM ET

In a post last week, Wall Street Journal reporter Jeff McCracken put a simple question to the heads of the M&A practices at banks and law firms across New York City: Has the mergers-and-acquisitions market bottomed out?
The answer was a near-unanimous no. (Just one banker said yes.) Among the reasons given was the fact that consumer confidence remains low. Not surprising, of course. The American consumer is the backbone of the economy and with confidence low that average American is unlikely to spend money. That in turn means corporate earnings will remain strained and companies will remain less comfortable doing deals.
But there also is the confidence of another type of consumer to consider–the corporate executive. A recent study by J.P. Morgan Chase and Thomson Reuters found a strong correlation between confidence and M&A. In other words, M&A often is confidence driven rather than opportunity driven. That explains in part why M&A takes off at the same time the economy is strengthening and the equity markets begin to rise.
Those running the companies aren’t all that different from that average consumer. When someone’s 401(k) is soaring and he feels secure in his job, he is more likely to feel comfortable enough to make big-ticket purchases. The same goes for CEOs. With a soaring share price and the company’s future not in doubt, a CEO is more likely to pursue a big acquisition.
So there is a slight bit of optimistic news from a recent study by Ernst & Young. As of last month, corporate executives at more than 570 companies surveyed are feeling, if not a bit more confident at least a little less pessimistic. In January, 82% of executives said the focus of their business was on restructuring to deal with the recession and 74% were looking merely at survival of their present operations. Those figures have since declined to 74% and 65%, respectively.
Still, amid the gloom 69% of the executives surveyed said they were “taking advantage of the recession to pursue new market operations,” an increase from the previous 59%.
In fact, more than a third of executives said business conditions have become more conducive to deal-making. “We have had a lot of our clients tell us that they missed taking advantage of the 2001 downturn,” said Michael Rogers, a principal for Ernst & Young’s Transaction Advisory Services group. “And now with some of their competitors trading at lower levels, they really do need to take a look and see if they can make something happen at this time.”
This isn’t to say an uptick in M&A is around the corner. Many of the executives surveyed don’t expect to see signs of life in the global economy until the second half of 2010 and only 18% of respondents said cash isn’t an issue (down from 25% in January).
“They all say they want to do opportunistic M&A and let’s face it, who wouldn’t want to buy something at a low price or 50% off,” Rogers said. “We love to buy our own personal goods like that, but until we know that our job is safe and our employer is safe, we are not going to make those big-ticket decisions. I think that is the same way a lot of corporations are thinking, because if you do the math, it’s telling you now is the time to try and get deals done.”
So, despite the bluster, it would seem that we’re backed where we started: The M&A market is too linked to overall confidence to show much improvement. Next stop, bottom.
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