KUHN CAPITAL Monday, March 19, 2018
Dispatches from the front

Animal Spirits Bottled Up

What ails M&A? Finally, some answers.


We see lots of self-promoting claims by M&A shops about how deal volumes and values are up in 2012. The implication of course is that now’s the time to buy or sell, and you should employ them to help you do it. But the stats they quote to buttress their Pollyanna stories don’t jive with what we see in the marketplace.

Finally, somebody has stepped forward with the courage to state the obvious: the transaction value of US M&A deals is predicted to be down this year compared to last and it still hasn’t recovered to anywhere near 2007 levels. Specifically, annualized US M&A volume is on track to be worth 4% of the market cap of all public companies this year whereas in 2007 it was 9%.

While other indices of economic health like public equity have mostly recovered, what’s up with M&A? In his article “The Long Pause: M&A in a Time of Uncertainty," Marshall Sonenshine of Sonenshine Partners and Adjunct Professor of Finance and Economics at Columbia University, takes on that question. The space we have here won’t let us do justice to the whole piece (which you can find on the Merrill Datasite website), so we’ll just hit the highlights:

1) M&A is easy to do wrong. Valuations creep skyward through a combination of buyer egotism and a reluctance to write off lots of time and money spent on due diligence. People are still smarting from the excess of animal spirits that peaked in 2007.

2) But M&A has always been cyclic. Here’s where Mr. Sonenshine puts his finger on it: M&A is a concentrated bet on a particular asset class. To make this bet requires clarity and confidence about the future. Who can feel a sense of clarity and confidence when Obama takes a Hawaiian vacation as we hurtle towards a “fiscal cliff,” regulators are attacking business with unprecedented energy, the Middle East is nuts, and the EU struggles with insolvency?

To this doleful list, we’d add two other factors not covered by Mr. Sonenshine:

1) While leverage to finance a transaction is cheap, it’s also quite scarce. Banks – burned in the meltdown – also lack confidence in the future, so they demand standards of creditworthiness that most mid-market companies can’t meet. Besides, banks are already doing fine by borrowing and re-investing amazingly cheap Fed money, and the FDIC second-guesses every business loan they make anyway.

2) A lot of would-be mid-market buyers aren’t doing so well that they’ve got cash burning a hole in their pocket. After years of penny-pinching, they still aren’t seeing dependable sales gains. Why gamble on M&A when you may need cash to ride out the next big surprise?

However, not all is not gloom and doom. For one thing, the cycle has always turned north after going south. More to the immediate point, we specialize in IT deals. Information technology endlessly innovates and for that reason, it endlessly consolidates.

America leads the world in this sport (software, online businesses, tech services, data, etc.), and that’s a measure of our creativity, technology savvy and willingness to take risks. While M&A activity in IT may also be down versus the 2007 bubble, it remains stronger and more reliable than nearly any other sector. We’re glad we operate in this protected niche.

Ryan Kuhn

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