"The stock market is weak, IPOs are hard, there's no M&A market to speak of." This quotation from Blackstone (BX) President Hamilton "Tony" James on a call to discuss the firm's second-quarter earnings.
This weakness is another sign that the economic recovery is not moving along very well. Earlier this year, many of us believed that 2012 was going to be a "gang buster" year for the merger and acquisition business.
One reason for this was the huge buildup of cash on the balance sheets of many potential buyers who were progressing well through the economic morass. Another reason for thinking this would be a big year in M&A was the exceedingly low interest rates. Some corporations, over the past year, like Microsoft (MSFT), for example, went to the capital markets and borrowed money where they had never even thought about issuing debt before.
Furthermore, many corporate valuations seemed depressed, making these organizations very attractive targets for those looking to expand their horizon. As a consequence, things looked good on the "deal" front. I tried to capture this in a January post.
However, things have not worked out that way. For one, the economic recovery has been anemic. Although we were not expecting United States economic growth to achieve the average level of economic growth over the last forty years of the last century - around 3.0 to 3.2 percent - we still expected it, as did almost everyone, to average more than the 2.0 percent or so actually posted. Thus, potential acquirers did not experience an ebullient environment in which to obtain additional assets.
Second, the regulatory situation has not been the most favorable. The year began with the reality of the AT&T (T)/T-Mobile breakup. I believe that this set a cloud over the whole M&A scene and created the specter of an administration in Washington, D. C. that looked on this form of activity with great suspicion. The potential cost of merger transactions rose substantially…the implicit costs as well as the expected explicit costs.
Third, the newly passed regulatory laws were not understood and not completely written. The role of financial institutions was cloaked in mounds of uncertainty. People just did not know where they stood.
Finally, there is the general uncertainty as to what is the economic policy of the administration. As of this time, the Obama administration seems to have no economic policy and this is adding even more uncertainty to what potential acquirers might expect in the future.
Blackstone's results for the first half of the year were not that good; they posted a $75 million loss, although this beat analysts' expectations.
And, analysts are not expecting a significant improvement in the M&A business in the second half of the year. Not only is there the continued weakness in the United States economy but the spread or recession in Europe and weakness in many of the world's large emerging economies.
So looking at what is taking place in the area of mergers and acquisitions, we add one more sector to those that are exhibiting problems and are confirming the basic weakness in the economy. I have discussed several of these other areas of weakness in blogposts over the past week or so. Some of these problems directly flow from the difficulties of the recent recession. However, quite a few of them are structural in nature and will require quite a bit of reform before they regain their strength and contribute to a more robust expansion of the economy.
Taken together, these problems help explain why the economic recovery is so anemic but also they help to explain why the recovery is taking such a long time to get things back to something more normal.