At these levels, one would think it is only a matter of time before we start to see some headline grabbing M&A activity. That said, companies are likely skid-dish here regardless of the attractive levels. Let’s take a look at some of the basic pros & cons of M&A.
- Valuations are extremely attractive as a result of the 17% drop in the S&P 500 since May 2, 2011 highs
- Corporations are holding a record amount of cash on their books
- As a result of the 2008 financial crisis, corporations are in some of their most efficient “lean & mean” states. Near max productivity per employee, operating at low labor costs, etc
- Borrowing costs are at historic lows
- Commodity prices are still high, increasing costs of goods sold. These prices can be hedged and/or passed through to the consumer, but the increased volatility in commodities prices is likely messing with corporate executives a bit.
- Valuations are attractive, but there is still a ton of concerning global economic news hanging over corporate executives heads.
- Political risk is a factor, and the uncertainty regarding the political landscape coupled with the 2012 presedential election around the corner has to be swaying corporations away from M&A interests for the time being.
Bottom Line: These valuations should alleviate some of the basic concerns displayed here. That said, there are far more advanced items that execs must ponder on a case by case basis. Regardless, we expect to see some big M&A activity in the very near future which in turn should bring some confidence back into this market.