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If only Viagra would help.
“Low CEO confidence” continues to hold back the mergers and acquisitions business at Goldman Sachs, according to CFO David Viniar. Viniar, speaking on Goldman’s conference call this week about second quarter results, said revenues from providing deal advice were down 30%, or $159 million, from last quarter. That’s a lot of lost fees.
Analysts on the call pressed Viniar for any signs of hope for a revival, such as latent deal interest that Goldman’s bankers might know about from their confidential conversations with company executives. The CFO’s response was polite, but not really encouraging. “There are a lot of conversations, but it’s been pretty high for a while and it hasn’t translated into deals,” Viniar responded, according to a transcript of the call. “I think people are feeling a little bit better, but not enough better to really pull the trigger, yet,” he said.
CEOs will need more encouragement to restore their takeover drive. “If you really have stable markets for another few months and see confidence start to get a little better, then I think you’ll start to see some uptick,” Viniar said.
Viniar’s forecast for at least months of waiting is probably reliable, unfortunately. If any Wall Street firm were going to get first wind of a revival of takeover appetites it would be Goldman. The firm, citing data from Thomson-Reuters, claimed first place for advising on the few deals that were announced in the first half of the year. And, odds are that if CEOs are confiding in anyone these days it would be Goldman since the investment bank’s performance the past six months have brought it lots of publicity, good and bad, for being the big winner in the aftermath of the Panic of 2008.
In normal times it might be good that CEOs satisfying an urge to conquer other companies and build empires. Studies by academics and BusinessWeek have shown that predictions of synergies CEOs use to justify takeovers often don’t come true. More often than not, their deals cost shareholders money. Any real gains from the business combinations tend to go straight into the pockets of the selling shareholders in the form of the takeover premiums they receive from buyers.
But in today’s bust, chances are the economy would be better off with more deals. More takeover would consolidate capacity in bloated sectors, such as retailing, and recapitalize debt-loaded businesses in industries such as media, home building and forest products. Plus, deals that come with the first phases of takeover waves are the most likely to be worthwhile. That’s because they usually struck at more sensible prices when CEOs and directors are nervously optimistic. In the later stages, caution get thrown to the wind as deal fever rises and CEOs pay too much for their conquests. It is in those deals that M&A leaves its darkest marks on capitalism.
The most effective tonic now would be cash. If CEOs had more piles of corporate cash and confidence that they won’t have to spend it before the recession is over, then more deals would start happening. Cash is what most sellers want before they’ll agree to a deal. right now they’re going to be especially wary of taking a bidder’s shares because stock prices are so unstable. It goes without saying that there’s no chance of bidders being able to borrow cash now to entice sellers.
This leaves just one mix of ingredients that could drive CEOs to pull the trigger on for more deals: cash and the courage to spend it. Too bad that’s not available in little blue pills. If it were, Goldman could buy them by the case.