Burning a Hole on the Balance Sheet
1. Quick Hits from MERGERS unleashed
2. Survey: Credit Crisis Impacts 60% of Middle Market
3. Motorola Unloads Messaging Biz
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部分: Round Up
For the past 18 months the deal community has been waiting for strategics to emerge as buyers; so what's the holdup?
The consensus among deal pros after the credit bubble burst was that
mantle of top buyer in M&A strategic acquirers would reassume thethe
market. This was based on the premise that corporations — having been
priced out of the market by the LBO shops — spent 2005 through 2007 stockpiling capital, the end result being a population of cash-rich companies hungry to put that money to work. But now, almost 18 months after
this idea became conventional wisdom, the deal community is still waiting for these "healthy" corporate balance sheets to translate into actual transactions.
A couple of theories exist as to why this hasn't happened, ranging from
assertions that balance sheets are no longer quite so strong to the
argument that corporate buyers are still waiting for a bottom.
To be sure, many balance sheets are showing significant deterioration. Take the case of Limited Brands, which had $1.2 billion of cash at the
close of 2008. At the end of February, the Columbus, Ohio-based owner of Victoria's Secret was forced to amend its credit facility to avert
covenant concerns. Days later, company also eliminated 400 employees the
to cut costs.
But it's not just balance sheet corrosion that's slowing corporate M&A. "CEOs tend to be poor market timers," advises David Harding, partner a
in Boston office of consultancy Bain & Co. He argues that stillborn thethe
renaissance of the strategic buyer was put off by a "cascading effect of conservatism" that gripped the marketplace as macro-economic trends reversed course.
"If you have a company with multiple divisions, everyone is going to hold back a little bit to ensure that they make their numbers," Harding says. If a company has as few as five divisions, this conservatism will increase by order of magnitude, and this seeps into the mindset of corporate
Google, for instance, had $15.85 billion of cash and cash equivalents as of December 31, 2008. Yet, when questioned about his M&A strategy at the
Morgan Stanley technology conference in March, Google's CEO Eric Schmidt advised that the time isn't yet right for deals. "We have largely been waiting for prices to get better," he said, according to a transcript found
on Thomson One Analytics. "The good news is we have lots of capital and
the bad news is we're still trying to get everybody into the model that
we really want in terms of their M&A. And I think it will start soon, but it's pretty inactive right now."
Another factor, Harding says, is that the commercial paper scare is having
the same impact on strategic acquirers as it does on private equity. Unless
buyers are looking at all-cash deals, companies are for the most part not
keen on amassing new lines of credit.
Harding notes that even stock-for-stock deals, transactions that don't involve any cash at all, can still trigger a change-of-control provision.
"In this environment, going from investment grade to non-investment grade is like falling off of cliff," he says. "Nobody in their right mind would contemplate that move right now if they could prevent it." Geoffrey Frankel, managing director of restructuring advisory services at National City Capital Markets, notes that many healthier companies are less inclined to make a purchase in this environment because they believe the same gains can be realized if their competitors simply fail. He adds this is a distinct possibility today, considering the shortage of DIP
lenders in the market, which means Chapter 11 bankruptcies are quickly turning into Chapter 7 liquidations.
"In a lot of industries, the leading companies don't want to pay for an
acquisition when they can just pick up new clients as their competitors disappear," Frankel says.
Another factor Harding alludes to is that cash on the balance sheet is
not necessarily corporate code for hale and hearty. "The amount of cash
you have can be fairly irrelevant," he says, identifying, "If you're in retail today, for example, you're going to have a lot of fixed
obligations." The implication is that the cash on the balance sheet may
be spoken for.
Still, sometimes things are just as they appear. In early February, for instance, game-maker Activision Blizzard reported alongside its earnings that had $3 billion burning a hole on its balance sheet with no debt to
speak of. A few weeks later, Mike Griffith, an executive at the company,
was quoted by Bloomberg as saying that Activision would in fact be scouring
landscape for potential deals. Of course, seeking out transactions the
can be far cry from actually completing deals, and Griffith added athe
caveat that company wouldn't "rush" into market simply because thethe
it has cash.
If Griffith is trying to time the market, however, he might be wise to
remember Harding's advice.
"The amount of cash you have can be fairly irrelevant."
"Companies don't want to pay for an acquisition when they can just pick up new clients as their competitors disappear."
Quick Hits from MERGERS unleashed Survey: Credit Crisis Impacts 60% of Middle Market
Managers of middle-market companies-those with revenues of $25 million to $1 billion-are not exactly upbeat in their outlook, according to a
survey conducted and published by CIT Group. Specifically, middle-market companies expect it to remain hard or become tougher for them to find financing.
CIT's survey found that more than 60% of the middle-market company
executives surveyed have experienced a "significant" or "moderate" impact
from the credit crisis. At the same time, 47% of the companies polled said
they are satisfied with their access to financing while 29% expressed dissatisfaction. CIT found that middle-market companies are less optimistic about their near-term outlook, but over the next 12 months more
actually expect to grow than contract. Mid-sized businesses, unsurprisingly, expect to cut capital expenditures and staffing. Not only will capital spending be down, but some businesses may hold off from launching a new product, says Peter Connolly, co-head of corporate finance at CIT.
Also, just over 51 % of the middle-market companies surveyed expect
mergers and acquisitions to decline.
Motorola Unloads Messaging Biz
VIST0, a California-based wireless messaging system, bought Good Technology from Motorola.
Good Technology specializes in offering wireless messaging, mobile VPN data access, device management and handheld security for enterprise customers worldwide and will help VISTO's development in the US, Asia and
The privately-held wireless technology outfit has already made inroads overseas, including a partnership announced almost a year ago with
Vodafone in Germany.
By Ken MacFadyen