December 8, 2008
M&A Activity Dries Up
By Tom Ryan
Despite ever cheaper valuations, merger & acquisition activity is virtually nonexistent because of challenges gaining bank financing. While some mergers are expected as fire sale situations emerge, the overall rate and type of mergers is expected to drastically change in 2009.
According to Capital IQ, the value of announced deals in first two months of the fourth quarter had dropped more than 60 percent from last year’s period – the lowest level in more than a decade. A big problem is that deals aren’t closing.
“The presumption in the past was that the regulators wouldn’t let it go through,” Joe Clark, managing partner of Financial Enhancement Group, told Smartmoney. “Now people are pulling deals off the table because they can’t get financing.”
Indeed, $322 billion in M&A deals had been cancelled in the first two months of the fourth quarter versus $362 billion in deals completed, so far in the fourth quarter, according to Thompson Reuters.
According to Business Week, the reason M&A deals have frozen up is pretty much the same reason the stock market has been tanking.
“Corporate executives, like investors, simply don’t know how bad conditions will get, so they’re holding onto their cash,” wrote Ben Steverman. “A smart acquisition at this time (just like a smart stock purchase) might scoop up a great value that could pay off long-term. But that’s a risky move when you don’t know if you might need that cash for a future need instead.”
He also noted that even if companies were willing to take on debt, banks aren’t lending. That’s the main reason U.S. private equity M&A is off 82 percent from a year ago, according to Thomson Reuters.
Nonetheless, some mergers are expected to occur as companies increasingly face liquidity issues and look to avoid foreclosure. A number of bankruptcies are also expected to occur to force companies to explore a sale.
Finally, a Women’s Wear Daily report noted that mergers are often healthy during distressed times because of the significant inherent cost savings.
“One of the reasons companies merge is because they are looking for economies of scale and synergies in their back-office operations,” Kirk Palmer of Kirk Palmer Associates, an executive search firm, told WWD. “I can’t think of a combination when companies haven’t consolidated jobs.”
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Recent Discussions
Discussion Questions
Discussion Questions: How
do you think the credit climate will affect M&A trends in 2009? What type of deals will get done? How will it affect overall consolidation in the retail space?
Poll
I think that mergers will pick up during spring 2009 and get more robust as the year progresses. Yes, credit is tight right now and companies with cash want to hold on to it, but as more money flows into the banking system, the pace of mergers will increase.
Right now things are really strange. The prime rate is very low but no one seems to be borrowing money. The stock price of REITs are so low that even some very solid ones are paying dividend yields over 20%.
Normally I count on a good bit of my business being from mergers and acquisitions. Just one or two a year makes for a good year. However, that end of the business is way down. For 2009, I’m hoping for an increase in bankruptcies and liquidations. That always brings in business. I think something will get the M&A activity going again, even if it is bargain hunters circling the living dead that can pick up new businesses without a big cash outlay.
In God we trust but merger if we must. With sales weakening, with profits falling, with God seemingly on the sidelines, and with expenses remaining high, there are two principle avenues ahead for the mediocre retailer to travel in 2009: bankruptcy and merger. The former is unpopular so expect more of the latter in the heated pursuit of anticipated efficiency–and whatever else that seems possible.
Be fearful when others are greedy, and greedy when others are fearful. There are smart people and businesses out there right now with a pile of cash and a good eye for value. They are acquiring. I’m sure there are good, small, value-oriented retailers who will also be taking advantage of the opportunity to lock up cheap assets (through M&A, lease terms, increasingly cheaper credit, etc.). In 10 years, we will all know their names. But if anyone knows their names now, I’d love a good tip!
The limiting factor in M&A activity in 2009 will be the health of the candidates more than the credit crisis. Historically, many mergers were executed because the participants thought they could put two weak companies together, cut duplicate overhead and have a winner in the end. These types of consolidations do not have a high percentage of successes even in the best of times. They will be non-existent in 2009. Even if there is liquidity in the markets, investors will move with great caution.
Any M&A activity that does move to completion will have at least one successful partner. Of course, that in itself is an issue. There is little confidence on who is successful. Even those retailers who seem to have some success and resources are not comfortable extending their risk to prosecute a merger. No one knows what economic conditions are around the corner and no one is forecasting with confidence.
“Location, location, location” is often the reason for retail mergers. Retailers are looking to move in to new markets or strengthening their positions in current markets. In this environment, it is pretty clear that new strategic locations will be available and probably at costs less then any retailer is currently committed to.
Financing is the mother’s milk of M&A. Without financing, ain’t no mergers or acquisitions. The better capitalized retailers will buy good locations cheap at the bankruptcy auction. Years ago, when Conran’s home furnishings went broke, Barnes & Noble bought the leases. A number of companies for sale aren’t getting any bids. None. Not even the bottom feeders, because everyone knows they’ll be cheaper when they’re bankrupt.
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I think that mergers will pick up during spring 2009 and get more robust as the year progresses. Yes, credit is tight right now and companies with cash want to hold on to it, but as more money flows into the banking system, the pace of mergers will increase.
Right now things are really strange. The prime rate is very low but no one seems to be borrowing money. The stock price of REITs are so low that even some very solid ones are paying dividend yields over 20%.
Normally I count on a good bit of my business being from mergers and acquisitions. Just one or two a year makes for a good year. However, that end of the business is way down. For 2009, I’m hoping for an increase in bankruptcies and liquidations. That always brings in business. I think something will get the M&A activity going again, even if it is bargain hunters circling the living dead that can pick up new businesses without a big cash outlay.
In God we trust but merger if we must. With sales weakening, with profits falling, with God seemingly on the sidelines, and with expenses remaining high, there are two principle avenues ahead for the mediocre retailer to travel in 2009: bankruptcy and merger. The former is unpopular so expect more of the latter in the heated pursuit of anticipated efficiency–and whatever else that seems possible.
Be fearful when others are greedy, and greedy when others are fearful. There are smart people and businesses out there right now with a pile of cash and a good eye for value. They are acquiring. I’m sure there are good, small, value-oriented retailers who will also be taking advantage of the opportunity to lock up cheap assets (through M&A, lease terms, increasingly cheaper credit, etc.). In 10 years, we will all know their names. But if anyone knows their names now, I’d love a good tip!
The limiting factor in M&A activity in 2009 will be the health of the candidates more than the credit crisis. Historically, many mergers were executed because the participants thought they could put two weak companies together, cut duplicate overhead and have a winner in the end. These types of consolidations do not have a high percentage of successes even in the best of times. They will be non-existent in 2009. Even if there is liquidity in the markets, investors will move with great caution.
Any M&A activity that does move to completion will have at least one successful partner. Of course, that in itself is an issue. There is little confidence on who is successful. Even those retailers who seem to have some success and resources are not comfortable extending their risk to prosecute a merger. No one knows what economic conditions are around the corner and no one is forecasting with confidence.
“Location, location, location” is often the reason for retail mergers. Retailers are looking to move in to new markets or strengthening their positions in current markets. In this environment, it is pretty clear that new strategic locations will be available and probably at costs less then any retailer is currently committed to.
Financing is the mother’s milk of M&A. Without financing, ain’t no mergers or acquisitions. The better capitalized retailers will buy good locations cheap at the bankruptcy auction. Years ago, when Conran’s home furnishings went broke, Barnes & Noble bought the leases. A number of companies for sale aren’t getting any bids. None. Not even the bottom feeders, because everyone knows they’ll be cheaper when they’re bankrupt.