The key issue in the area of mergers and acquisitions in 2012 is still uncertainty. There seems to be a lot of anticipation that the activity in this area could pick up during the year, but, like last year, there may be little to come of it.
Many corporations still seem to have a ton of cash around. Furthermore, the corporate bond market is flush; companies “sold $44.2 billion of both high- and low-rated corporate bonds this year, the highest on record for the time period ... ” According to the Wall St. Journal, investors are “snapping up bonds ... pushing the cost of borrowing for some issuers to record lows.”
“The yield on below-investment-grade, or ‘junk’ bonds fell to 7.93% Wednesday, the lowest since August 5 according to a Barclays Capital index. An index for investment-grade bonds, which are of a higher credit quality, was at 3.62%. In comparison, on Thursday the 10-year Treasury note yield rose to 1.972%.”
Funds are available.
Corporate breakups are likely to continue or even accelerate in 2012. Economic growth is not picking up speed. Europe looks as if it is in another recession and this does not bode well for the rest of the west. Companies are finding that the conglomerate structures they built up in recent are not very helpful in times like these, especially for those organizations that are suffering under the burden of too much debt.
The western world is re-grouping from the excesses of the past ten to twenty years. Those that still have the time to adjust are downsizing -- laying off employees and discarding non-central businesses. Those that don’t have this time are attempting to sell outright.
Those looking for deals have the ammunition to pull off these deals and they know that this is a “buyers” market with depressed valuations available. They have the capability of being aggressive. Whether or not they activate this aggressiveness is another question.
This is because a cloud remains over the M & A market, a cloud that kept many firms on the sidelines in 2011. First off, a great deal of uncertainty exists with respect to the future of the economy. Government stimulus policies, both monetary and fiscal, have not worked to any degree and it is debatable whether or not any additional actions will achieve much more.
In addition, Europe appears to be in recession right now and, given its sovereign debt crisis and the state of its banks, any recovery seems to be some way off. It is uncertain how the situation in Europe might play out in the United States.
Second, there is the upcoming election in the United States. The uncertainty surrounding the policies of the American government with respect to business and finance over the past three years has been enormous -- and largely uncalculable. At this time, we just don’t know how much the uncertainty in this area has retarded the recovery of American business and economic growth.
Further uncertainties exist with respect to the impact of other actions of the federal government in areas like health care, the environment, and foreign affairs. Some people are just learning about the expenses they are going to have to absorb with respect to Medicare, doctors fees, and health insurance. As people learn more and more how their budgets are going to be affected, adjustments will be made to spending patterns and they won’t be up.
Third, in addition to the uncertainties created by new financial regulations and the complexity of these new regulations, there appears to be a growth in the government’s application of the anti-trust laws. The recent treatment of the AT&T (T)/T-Mobile merger is a case in point. The government, ‘feeling its oats’ from this action, will probably step up its aggressive behavior in this area, leading to even greater uncertainty relative to M&A activity.
Early in 2011, it looked as if there might be a big pickup in merger activity for the year. Many of the same conditions we see today existed at that time. And, what happened?
M&A activity did pick up in 2011 from previous years but we did not see the ‘big jump’ that many of us expected. Instead of buying companies, many firms used their cash on hand or their ability to borrow at ridiculously low interest rates to buy back their stock. This, of course, helped stock prices but it did not help the economy.
But even a pickup in M&A activity will not do a lot to help the economy, especially in the short run. Buying companies outright or buying pieces of companies will initially result in efforts to achieve greater corporate efficiencies, higher levels of productivity, and will mean more reductions in employment. This is a part of the “creative destruction” of a market economy.
And, this should not be surprising. The American economy has been subject to fifty years of credit inflation. In such a time, among other things, businesses come to focus more on finance rather than production, they acquire other businesses that are not related to their core operations, and they hoard labor.
The other side of the business structure created by credit inflation is the need to unwind and restructure what was built earlier. That is what we face now.
Let’s hope the boom in M&A business does take place. Let’s hope that the corporate cash and corporate borrowing do not go just to corporations buying back their own stock. Let’s hope that the unwinding and restructuring takes place because that is one prerequisite for business to get back to the capital investment activities that do drive economic growth.