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February 28, 2007
Stock market woes unlikely to depress deal market ...
... at least for now. "If yesterday's decline holds ... and I'm not sure it will, we actually would be busier. It would certainly be good for private equity, because lower stock prices would lead to lower prices for deals. That would increase activity," says Steve Krouskos, the leader of the Americas unit at Ernst & Young Transaction Advisory Services. He advises private equity firms that are vetting deals.
Buyout activity is driven by access to cheap capital. So the real threat to deal activity would be a sharp rise in interest rates, and that seems highly unlikely, given the latest news about weakness in home sales and downward revisions of economic growth, Krouskos and other experts say. Several years ago, there were fears of deflation--a weak economy and rising interest rates. That's a highly unusual scenario, because rates typically fall when the economy is weak. There can be exceptions, such as the need to raise rates in a slow economy to protect a weak currency.
Given the huge volume of cash that has been raised, funds have little alternative to spending and investing anyway.
Many people are betting that the decline in the stock markets in Asia and the U.S. won't last long, which means that their impact on deal activity should be muted. Says Phillip Phan, professor of management at the Lally School of Management and Technology, Rensselaer Polytechnic Institute:
"My personal opinion is that the stock market moves ... are temporary. Everyones' freaking out because of China's market. However, if you look at markets in the region (most notably Hong Kong) there isn't much response. Cooler heads will prevail ... (there are) great buying opportunities in banking, resources, and b2b technology ... and the deals will go on. Hopefully this correction will allow the corporates to not overpay so much on the deals they are doing or maybe renegotiate the prices of the assets that are in play."
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This seems to have been a market event not a real economic event so the effect on deals and dealmaking should be minimal. Having led a MBO that was announced on 9/11, and havig closed the deal successfully, I can tell you that deals that make economic sense and have the potential to deliver real value can be done at any time, even under the most adverse circumstances. Deals that are of questionable value will and should be at risk, even when times for dealmaking are good.
Posted by: Edward Peters at February 28, 2007 08:30 PM