In this economy, mergers and acquisition news have been faint at best. If anything, economic climates are demanding that businesses curtail their budgets anywhere they may see fit. One area is certainly in mergers and acquisitions, where outside the banking industry, there has been little activity.
Companies Are Cheap to Others
Although some investors are still waiting for an obvious bottom, firms are considering which of their rivals might make an excellent addition to their portfolios. Now 50% cheaper than one year ago, stocks as a whole are a perfect opportunity at today's prices, and further consolidation of many fast growing industries should be expected as companies falter and assets become cheaper.
Premiums are Gone
Investors are used to seeing a buyout offer 20-30% higher than the present valuation on the stock market. For many businesses, that means their competition no longer requires a premium over the price many were willing to pay even one year ago. A temporary drop in stock prices should be met with ample buying opportunities from competitors, but there are a variety of other events that must first happen before the buying spree begins.
Revival in Financing
Investment banks are mere shadows of what they once were. Their vast holdings have been cut in half, and many are under water after the derivatives time bomb AIG began defaulting on its payments. Very few mergers and acquisitions are completed entirely in cash, and many are completed with the help of financing or stock deals. To finance these several billion-dollar takeovers, investment banks need liquidity and a solid ground to do business. With exception to Goldman Sachs, all other investment banking firms are underwater and producing limited deals between firms.
Certain sectors of the economy must be in good fiscal shape before the stock market makes its next bounce. As a whole, businesses are not nearly as productive as one year ago; however, there are several sectors that are booming as the rest tumble. Even in real estate, where the majority of firms are losing cash each and every month, other businesses in the same sector, including real estate sales firms and cleaning agencies, are cashing in on all the excess supply.
Mergers Could Send the Stock Market Higher
Mergers and acquisitions are the missing link to returning to last year's prices. There must be two kinds of liquidity for stocks to make new highs. First, there must be interest from traders and short term investors to keep the markets moving by meeting bid and ask prices. Secondly, there must be enough business interest, mergers and acquisitions, to solidify stock prices. Something is only worth what another individual is willing to pay for it, and this certainly includes whole businesses.
Possible Merger Plays
The banking industry is an obvious play; however, any future consolidation could come at a higher cost than just a few months ago. Further consolidation in the car industry should be expected, although many anticipate it will be the result of government intervention rather than one firm buying another. Emerging technologies like solar energy are ripe for the picking, and government incentives, such as subsidies and tax breaks for the purchase of energy efficient products, sets up a basic demand line. Retailers of all types are cash rich and could be ready to make aggressive real estate plays with commercial properties so strongly undervalued. There's money out there waiting to be spent; should you pick the right stock, you'll exit at nearly the value of the company one year ago. If there is anything investors should anticipate or desire, it's a buyout.