Enthusiasm for mergers or acquisitions in the first quarter of 2012 was low as CEO confidence for doing deals seemed to be missing.
Corporations are still sitting on “tons” of cash and longer-term interest rates, across the board, remain exceedingly low and funds are available. Yet global M&A activity in the first quarter of 2012 was at the lowest level since the first quarter of 2003.
The biggest concern in the executive suite seems to be that old demon “uncertainty.” There is uncertainty about the economy; there is uncertainty about where President Obama stands on business; there is uncertainty about events in Europe and the world; and there is uncertainty about the regulatory and legal environment.
This “uncertainty” is one of the contributing factors to fact that there is not more robust economic growth (see my earlier post). For people to commit, they must have confidence that what they are doing has a good chance of succeeding.
Attitudes seem to be modifying a little. If anything, as someone has described it, there is a general lack of bad news. Not too encouraging, but this can be all right too.
The economy is growing, there are some encouraging signs here and there, and, although there are still major things to watch out for, people do not seem to be expecting major shocks to the system. Monetary policy is relatively benign at the present time and is expected to remain so through the fall election. But the monetary authorities are prepared to respond strongly against any major shock to the economy if such a shock occurs.
Within this environment, more and more discussions about acquisitions seem to be taking place between organizations. Ideas and plans that had been put on the shelf seem to be back in people’s minds again.
Special interest seems to be focusing, not surprisingly, on Europe. The financial crisis of the last few years has drained the continent in many ways and there seem to be quite a few potential targets available at rather good prices.
Starting out a new quarter, following a quarter that saw strong stock performances, comes the news that Coty, Inc. of Europe is making a bid for Avon Products (AVP) even though Avon is more than twice the size of Coty. The importance of this is not so much the deal itself, but the fact that action in this area seems to be increasing. The economy is growing, monetary policy is permissive, cash is available, the stock market has been strong recently, and it is spring!
“The main thing to really resolve is the absence of confidence, so you need a couple of people to jump into the bath and say the water isn’t so bad in here.” -Daniel Wolf, a partner in the law firm of Kirkland & Ellis.
Basically, some people have to be brave enough to take the plunge! Then others may follow.
A pick-up in M&A activity may not cause economic growth to increase -- in fact, I don’t believe that it will -- but it may help to spread more confidence around, which will lead people to buy more common stock or pay off more debt. Each of these things will help to confidence to grow and expand -- both of which are necessary for the economy to continue on its upward path.
I would expect this to be particularly helpful in causing the price of stocks to rise. The reason for this is that historically, a good time to buy common stocks is when people and businesses are cautious and exhibiting a disciplined approach to what they are doing. It is a good time to acquire when people and businesses are being very selective.
Generally, this means that prices are low and attractive acquisitions can be made. It also means that not everyone is jumping into the pool so that the level of the entire pool is rising. That is, that people and businesses are just buying things without any real reason except that things seem to be going up.
Let’s keep our eyes on those corporate cash hoards to see whether or not companies are moving more aggressively into acquisition mode. My belief is that if the pace of M&A activity picks up, this will be a show of confidence that will benefit us all.