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— Deals —
After all, credit has dried up. Buyers' equity has declined with the world's stock markets. And confidence in the future cannot be high within any major industry group. While the situation sounds horrendous, the reality is most of the mergers we've been working on continue to move ahead. Just three of 20 North American Booz & Co.-involved deals I looked at recently have been canceled, and only one of those is for credit reasons. Four are on temporary hold with intent to continue. For all the rest, negotiations are on, though the pace of talks (excluding distressed sales) is more deliberate.
This reflects a larger trend we've seen in the M&A environment. The
number of U.S. merger transactions, which had been holding fairly
steady as recently as 60 to 90 days ago, is now down 23% versus the
same period a year ago, according to data provided by Capital IQ.
There were 934 announced U.S. deals in the past 30 days (through Oct.
7), compared with 1,213 during the same period in 2007. Dollar volume
actually has increased, nearly tripling to $204 billion from $72
billion a year ago, but those figures are skewed by three large
financial services buyouts totaling $114 billion.
So if merger activity is down but not out, the obvious question is why. Are buyers and sellers overly optimistic? To the contrary. I'd say they are realistic and focused on a few key facts. First of all, cash is king. When I spoke about this on CNBC recently, one of the interviewers went further, jumping in to say cash was actually "God." While invoking a deity may be taking the comparison a bit too far, the value of cash cannot be understated in this type of environment. There are strategic buyers, with unfilled aspirations, sitting on large amounts of cash and watching targeted asset values decline significantly. So if a deal is strategic in nature -- with rationale that transcends the current market mayhem -- it's a pretty good time to move ahead. If there is a slowdown, it will be seller-led as reverse sticker shock sets in. Second, private equity firms, while a bit more cautious in this environment, are out there now shopping among the bargain assets. As we know, private equity firms were to a great extent drivers of the M&A boom we recently experienced. Their transactions are financially driven, so they are always looking for opportunities to improve potential returns. In many cases, they are now using the current crisis to negotiate more aggressively and/or are doing smaller deals with more equity that can be refinanced later. Lastly, in many industries it is the pending economic downturn that will truly influence dealflow, far more than the credit crisis alone. Slowing overall economic activity will affect merger activity in two ways. First, it will accelerate marriages where companies need scale and growth. Second, it will slow deals when target company Ebitda outlooks fall below acceptable limits. Some people portray the M&A arena as populated by a bunch of short term-driven cowboys. In reality strategic buyers, in particular, are continuously looking at potential transactions. Announced deals are typically in the works for many months, with rationale that transcends short-term events. Sometimes talks are on and off for years. When the time is right, negotiations heat up. Periods such as these do create opportunity, as well as a lot of pain. Those who can remain objective and analytical often use such times to put transactions into motion so they can be ready to pull the trigger when the uncertainty is gone. Gerald Adolph is a senior partner at Booz & Co. and head of the firm's mergers and restructuring group. |
The meltdown we're experiencing in the world's financial markets might be expected to stop merger activity cold. 
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