By Tom Ryan
Despite ever cheaper valuations, merger & acquisition activity is virtually nonexistent because of challenges gaining bank financing. While some mergers are expected as fire sale situations emerge, the overall rate and type of mergers is expected to drastically change in 2009.
According to Capital IQ, the value of announced deals in first two months of the fourth quarter had dropped more than 60 percent from last year's period - the lowest level in more than a decade. A big problem is that deals aren't closing.
"The presumption in the past was that the regulators wouldn't let it go through," Joe Clark, managing partner of Financial Enhancement Group, told Smartmoney. "Now people are pulling deals off the table because they can't get financing."
Indeed, $322 billion in M&A deals had been cancelled in the first two months of the fourth quarter versus $362 billion in deals completed, so far in the fourth quarter, according to Thompson Reuters.
According to Business Week, the reason M&A deals have frozen up is pretty much the same reason the stock market has been tanking.
"Corporate executives, like investors, simply don't know how bad conditions will get, so they're holding onto their cash," wrote Ben Steverman. "A smart acquisition at this time (just like a smart stock purchase) might scoop up a great value that could pay off long-term. But that's a risky move when you don't know if you might need that cash for a future need instead."
He also noted that even if companies were willing to take on debt, banks aren't lending. That's the main reason U.S. private equity M&A is off 82 percent from a year ago, according to Thomson Reuters.
Nonetheless, some mergers are expected to occur as companies increasingly face liquidity issues and look to avoid foreclosure. A number of bankruptcies are also expected to occur to force companies to explore a sale.
Finally, a Women's Wear Daily report noted that mergers are often healthy during distressed times because of the significant inherent cost savings.
"One of the reasons companies merge is because they are looking for economies of scale and synergies in their back-office operations," Kirk Palmer of Kirk Palmer Associates, an executive search firm, told WWD. "I can't think of a combination when companies haven't consolidated jobs."