Wednesday, June 6, 2007

Pattern Recognition

I had nothing better to do this morning in between client meetings in Beantown, so I decided to trot on over to the ACG Boston Growth conference and listen in on a panel session on the state of the M&A market. (I registered as Ben Bernanke, just to see if anyone noticed. They didn't.)

I usually try to avoid such feel-good gabfests, since they uniformly sound like variations on the old Buster Poindexter song, "Hot! Hot! Hot!," but I thought this one might offer more variation than normal, since the focus of the conference and the panel was the middle market. I was wrong.

The panel was emceed by the redoutable and charming Jay Jester (I kid you not) of private equity shop Audax Group and consisted of an investment banker, a lawyer, a capital provider, and an accountant. (I am reminded of the joke about the Arab, the Jew, and the Ukranian who walk into a bikini waxing emporium, but my lawyers have warned me I cannot tell such jokes to a mixed audience such as yourselves. Sorry.)

Anyway, a great deal of call and response ensued between Jay and the panelists on the state of said market, and whether or not one should expect a great clanging and crashing sound anytime soon as the wheels come off the proverbial bus. I was unsurprised to learn that everyone remains cautiously upbeat—code words for "Who the hell knows? I am burying acorns as fast as I can before the first snow comes." And, while everyone could see signs of stresses and strain, particularly in the leveraged finance market, no-one could identify the likely catalyst for a true market shutdown.

Anodyne stuff, really, and definitely not worth me giving up reading Maxim in my hotel room while I waited for my second sell-side pitch meeting of the day. Just as I was beginning to compose a vicious e-mail to my assistant decrying her failure to pack a copy of the lads' mag in my briefcase for the trip, however, my attention was yanked back to the presentation. Jay flashed a series of charts up on the screen which compared and contrasted the annual M&A volumes in the mid market between the last M&A cycle and this one.

Now, due to the clever slight of hand he used in applying different vertical scales to the different time series, the patterns matched up quite nicely, and an unsuspecting member of the audience could draw the conclusion that, based on prior experience, we are a good three to four years away from the end of the current M&A boom. In fact, Jay then asked each of the panelists where they thought we were in the cycle, based on the last cycle's pattern: 1996, 1997, 1998, or 1999. Most of them chose 1996, which I found amusing since it implies we have a good 40% upside in deal volume from last year before it levels off for three years. Only the investment banker demurred and chose 1997 or 1998—still good, but by implication closer to the end of the cycle and less susceptible to growth in deal volume.

Inattentive readers of this blog and members of the general public might be surprised that a financial prostitute an investment banker failed to abjectly whine and grovel at the feet of a paying client and displayed even the slightest hint of behavior at odds with rampant optimism. Perhaps his relative caution was due to the fact that investment bankers always urge their clients to do a deal RIGHT NOW, before the window closes, as Jay alleged. Or perhaps it could be attributed to the banker's 20 years of experience, and having lived through a couple of real M&A cycles. I prefer to think the answer lies in the fact that of everyone on the panel, the investment banker was the only one whose business does not rely for 70% of its revenues and 120% of its profits on the current overheated deal frenzy of private equity groups.

In any event, I am sure the investment banker will soon send a Ukranian prostitute or a case of champagne to Audax to atone for his presumption, so all will be well.

In the meantime, the question of if and when the current M&A boom will stop remains unanswered, at least to my satisfaction, and probably remains unanswerable to us poor souls caught in linear time. There are a few suggestive indicators out there, like Ray Soifer's Harvard MBA index, which bode ill for the general equity market and, by extension, the M&A market. However, the optimists among us can always point to contrary indicators that show all is for the best in this best of all possible worlds.

Barring an unequivocal sign or an ineluctable argument, though, I prefer to rely on my gut. And I am telling you, Dear Readers, something just doesn't feel right.

© 2007 The Epicurean Dealmaker. All rights reserved.