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The Ripple Effect of the American Economy Impacting Mergers & Acquisitions

The financial challenges brought about by the current housing market credit crisis are starting to have a ripple effect through the American economy. This is impacting not only the housing industry and its multitude of related industries but other commercial interests as well, including mergers and acquisitions. In the past few months, the AccuVal AdVisory has reviewed the economic factors influencing the retail, housing, and flooring industries. This month, the focus will be broadened to the ripple effect the economy is having on M&A activity, which has been diminishing compared to previous years.

Volume

Historically, the volume of M&A has been steadily growing. In fact, early reports estimated that 2007 would be a record breaking year, exceeding the transactions completed in 2006. In fact, the first nine months of 2007 showed a difference of only 4%. Unfortunately, there was a decline of more than 40% within the last few months resulting in 2007 barely exceeding 2006 results. It is thought that 2008 will continue to show a slowdown in activity due in part to increased difficulty in securing the necessary financing during at least the first six months of the year.

Value

Experts agree that while the pricing or value of M&A has not been significantly impacted to date, it is expected they will begin to decline as the volume of transactions continues to decrease. A majority of the transactions completed in 2007 have been smaller, on average, compared to those of the previous year. One measurement of the decline is in the private equity sector. In the last quarter of 2007, private equity groups raised $30 billion a significant decrease when compared to the record $60 billion raised previously.

Driving Forces

Several key forces were expected to drive the increase in M&A during 2007, including the globalization of the money management industry and the separation of distribution and manufacturing. It was thought that these two trends would drive additional megadeals. It was also thought that some public offerings would play a role. For 2008, it is anticipated that the weakening dollar will invite foreign purchasers to expand global capabilities. Domestically, M&A activity will continue to decline due to overall economic instability and changes in the private equity market.

Going Forward

The experts agree that the level of M&A taking place in 2008 are heavily impacted and influenced by specific market indicators, including housing, interest rates, and unemployment. It is expected that M&A activity will continue, but it will be different than recent years. Pricing on deals will be lower, buyers will be more cautious, and the number of megadeals will decline significantly. It is also expected, however, that the private equity sector will be scouting those companies that are distressed or offer the greatest opportunity for bargaining. The industries that are expected to have the most activity in 2008 include energy, health care, financial services, and technology.

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