Granahan: Bullish On Bears
July 24, 2009
Not long ago -- just before everything allegedly changed forever on Wall Street -- it was commonplace to read and hear about how great things were. Globalization meant an endless stream of M&A, an exploding investor class meant double-digit annual gains for the S&P 500 as far as the eyes could see, and jobs, well, "full employment" was the catchphrase.
Sure it was all built on a house of cards, but it sounded so convincing.
Some day in the not too distant future we'll likely be back there again, wondering how we ever thought that Washington was really going to change how the Street works, and lamenting the fact that we didn't buy Goldman at $160. But what's intriguing now is that, even in this environment, some corners of the market just might be ensconced in their own impressive little bubbles.
To say that the bankruptcy and restructuring space is going like gangbusters is the opposite of breaking news. If you're a lawyer who knows what "Chapter 22" means, you're in business. But the froth in the distressed arena is starting to evoke memories the likes of which some of us haven't seen since Pets.com and $250 price targets on oil.
A survey of investment bankers, private-equity and hedge fund pros, and some attorneys was commissioned recently to take the pulse of the distressed M&A market as we enter the second half of the year. The results were astounding: 92% of those queried say the current economic pullback will provide greater discounts on distressed assets than have been seen during previous downturns. That's an awfully bullish number, at least if you're a buyer.
"Both buyers and sellers are expected to eagerly pursue deals, as each side stands to gain unique benefits," said one of the attorneys at Pepper Hamilton, which co-sponsored the survey with Carl Marx Advisory.
I don't know about you, but that sounds to me a bit too much like a breathless real estate agent circa 2006.
One nice thing about financial markets is that there are always opportunities, regardless of direction -- distressed folks love downturns, bond players can make out while equity investors spin their wheels, and short sellers thrive in down markets. (As an aside, now that stocks have stabilized is it fair to say the SEC is no longer in the business of manipulating markets by forbidding short-selling?)
For the restructuring crowd, maybe it really is the stock market equivalent of 1996-2000. But just as equity investors found out back then (remember the "new paradigm?"), economic cycles are alive and well. The workout pros have found their sweet spot now, but they may be well-served to keep an eye on a potential recovery.
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