Is August's M&A Revival Sustainable?
August 24, 2010
It’s been a confusing August. On one hand, M&A activity soared last week, posting volume that at $89.8 billion represented the busiest seven-day stretch since the first week of November. At the same time, optimism seems to be in pretty short supply. Morgan Stanley’s Stephen Roach was on CNBC just this morning discussing the inevitability of a double-dip recession.
Andrew Ross Sorkin tried to make sense of the market in an interesting, albeit inconclusive, column about the state of M&A.
I tend to agree that while this has been an impressive August, it doesn’t necessarily reflect a true renewal either. Deal flow has picked up, driven by stronger credit markets, a weak IPO market and PE firms hoping to secure exits.
Does this eliminate the uncertainty that has stifled activity for the past two years? Not really, because the credit markets, while healthier, still wouldn't be able to deflect a major shock. Three years ago, for instance, I never gave much thought to existing home sales and its relation to M&A. This morning, I’m trying to if and how market participants will react to the 27% drop.
When Onex Corp.’s Seth Mersky spoke in the firm’s quarterly earnings call in the second week of August, he painted a pretty positive picture. Deal flow is picking up while the firm’s portfolio continues to improve. The credit markets, meanwhile, have been there to support major investments, such as Onex's July Tompkins plc deal.
At the same time, Mersky rained on the firm's own parade by highlighting all of the looming questions that still give most dealmakers pause.
For instance, the “significant improvements” in portfolio profitability, Mersky said, is almost “entirely” the result of cost-cutting. That could be considered a positive sign for M&A, as companies will turn to acquisitions to drive growth. But deals spurred on by fear don’t seem as sustainable as acquisitions driven by optimism.
Mersky also chose not to overlook questions about consumer sentiment and the threat of a double-dip recession. He used an anecdote from a portfolio company’s town meeting to reflect the concerns. The company’s workers, he said, were more focused on whether or not job cuts were on the horizon. The topic of possible year-end bonuses barely entered into the conversation. “Most of us are still looking down, not up,” he said, adding that this sentiment actually makes the possibility of a double dip nearly moot.
“The fact remains, we haven’t climbed our way out of the first dip just yet,” Mersky described.
This tells me that dealmakers are forging ahead in spite of ongoing concerns. That’s a pretty good sign for the market, but it doesn’t exactly suggest the revival some might be hoping for based on the August activity.
1 Comments
The topic of possible year-end bonuses barely entered into the conversation. "Most of us are still looking down, not up," he said, adding that this sentiment actually makes the possibility of a double dip nearly moot.android tablet pc
Posted by: Knife M | December 7, 2011 9:33 PM
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