Arthur: "Now stand aside, worthy adversary."
Black Knight: "'Tis but a scratch."
Arthur: "A scratch? Your arm's off!"
Black Knight: "No it isn't!"
Arthur: "Well what's that then?" [pointing to the arm lying on the ground]
Black Knight: "I've had worse."
Arthur: "You liar!"
Black Knight: "Come on, you pansy!"
— Monty Python and the Holy Grail
I try to stay positive, Dear Readers, I really do.
While I have never detected in myself that raging strain of congenital optimism prevalent among so many of my confrères in the investment banking world, I do make determined efforts to remain chipper and upbeat with my various clients in the face of the current M&A market slowdown. Like a good little M&A banker, I tenderly hold their hands and reassure them that their faltering little pissant transaction is only a heartbeat away from a spectacular and satisfying conclusion worthy of the record books. Were I not already aware that maintaining such an attitude is simply good business practice for a hired gun strategic advisor, I would no doubt be swayed by the heavy penalties Ye Ancient and Hoary Guild of M&A Workers is wont to impose on its members who are not seen in public with relentlessly cheerful grins plastered on their well-groomed kissers at all times.
But here, nestled comfortably in the bosom of my Trusting and Nonjudgmental Readership, I feel safe in sharing some of my skepticism concerning what I consider to be the excessively optimistic outlooks for the M&A market which are periodically published in the mainstream media. (The reassuring cloak of anonymity helps.)
The latest salvo of happy talk from the land of Honah Lee with which I feel compelled to take issue comes to us courtesy of WSJ's Deal Journal, wherein Stephen Grocer and some pals from Ernst & Young's transaction advisory services group attempt to reassure anyone who will listen that things, really, are not so bad after all.
Yes, global deal volume is down 26% from last year. Yes, the credit markets continue to sputter and talk of recession abounds. Yet amid the doom and gloom, it should be pointed out that 2008 has actually been a pretty good year for deal making.
True a 26% drop is steep. But is it fair to compare 2008 to 2007? ...
Consider another comparison: Global deal volume this year is up 3% from the same period in 2006. And remember, 2006 was the biggest year in M&A history prior to 2007, with $3.93 trillion in M&A volume, according to Dealogic.
Okay, true: so far 2008 has not turned into the Slough of Despond like 2002–2003—yet—but the 2008 over 2006 year-to-date comparison becomes less compelling when one recalls that a great deal of 2006's then-record deal volume came in the fourth quarter, as the Great Deal Engine of 2007 began revving its motors in earnest:
Oops.
Furthermore, an unsuspecting reader who has forgotten his rose-colored glasses at home might read the nifty little quarterly deal volume chart above—and Mr. Grocer's own relation of successive 47% and 33% falls in deal volume in 2001 and 2002 from prior highs—with a great deal less equanimity than he does. One might even draw the conclusion that, based on recent historical patterns in the M&A market, we have a great deal further to fall from current levels than we have seen to date.
Nevertheless, I concede that past is not necessarily prologue in the M&A market. Perhaps declining volumes and declining confidence will not work hand in hand to foster drastically lower deal activity, as they have in the past. This time, maybe it really is different.
Mr. Grocer—or his E&Y sources, it is not really clear which—certainly seems to think so. He gives four reasons why volume declines from 2007 should ameliorate:
1) Deal making fell off the cliff in the second half of 2007. So at the very least 2008 will face easier month-over-month comparisons going forward.
Translation: I have excellent news, Mr. Rutherford. The gangrene advancing up your leg slowed dramatically once it reached your groin area.
2) Corporates and private equity buyers have gobs and gobs of lovely cash, which is simply burning holes in their respective pockets. Plus, strategics simply have to buy stuff. The Polynesian god of globalization says so.
Do you hear that, Steve Ballmer? Get off your ass and buy Yahoo!, you moron. It's globalization, and consolidation, and strategic imperatives, and stuff. Sheesh. You might also want to put in a bid for one of those shitty legacy airlines the Wall Street Journal has been flogging to everyone and sundry for the past 12 months. I'm sure there's a "globalization" angle there somewhere. I dunno: world travel?
2) (continued) Oh, and just you wait. Private equity has boatloads of simoleons they have to put to work, too. Boy oh boy, as soon as those pesky banks start lending money again and stop renegotiating higher interest rates and tighter covenants on existing bank facilities every time a healthy PE portfolio company wants to do an add-on acquisition, you're gonna see private equity bounce back, big time.
Uh-huh. Just you wait. Any day now.
3) It's true those damn sellers just haven't adjusted their expectations down the way they should have already. Stubborn bastards. Well, they'll collapse in despair soon, and everything will be rosy again.
There might be that little, tiny, baby problem that the only sellers who sell at low multiples are the ones who have to. These, by definition, comprise a much smaller number (read:lower deal volume) than those who sell willingly when the Seventh Fleet of drunken buyers pulls into port (viz., e.g., 2007). There is also that disturbing documented tendency of sellers to cling to higher value expectations in the face of a declining market much longer than efficient market theorists (and cheapskate buyers) would predict. Existing home sales, anyone?
Lastly, my favorite:
4) [The] M&A marketplace is increasingly global. Sovereign-wealth funds are ... prowling on the M&A front. Meanwhile, corporations from Brazil, Russia, India and China are looking to do deals. In the first 19 weeks of 2008, M&A volume reached $91 billion in Brazil, Russia, India and China, up from $78 billion a year earlier. Companies in those countries, like Vale, are looking beyond their borders. The Brazilian miner is raising $15 billion that it may deploy to do deals.
Woohoo! $15 billion. Look out baby!
Of course, at $91 billion year to date, annualized M&A volume from the BRIC countries would make up only 6.3% of 2006's global total. A pipsqueak is still a pipsqueak, no matter how fast he is growing.
Anyway, I guess I can't blame Mr. Grocer or Deal Journal for talking their book. After all, it must be pretty tiring to rehash the same old story every day about Jerry Yang, Carl Icahn, or Seth Tobias. I'm even more sympathetic toward the E&Y TAS guys. Christ, with the percentage of their business which depended on the private equity feeding frenzy—and which has vanished overnight—those guys must be scrambling to place positive M&A stories in every high school paper and church group newsletter they can, much less the WSJ. The Carlyle Group sure as shit isn't returning their calls.
Of course, optimism, determination, and a positive attitude are all admirable things. As I have stated in the past, the typical investment banker simply cannot survive without them. However, one must still guard against losing complete touch with reality, or reality might happen by with a really sharp sword and chop your limbs off one by one. There's no upside in being a looney.
© 2008 The Epicurean Dealmaker. All rights reserved.
