Tim Cohen
9 November 2009
column
Johannesburg — From a corporate perspective, 2009 is shaping up to be the year that wasn't. The story of the year is the story of corporate deals that never happened, IPOs that were postponed or never mentioned at all, and an astounding, almost total absence of private equity deals of any significance. Even BEE deals seemed slow in coming and some of those that did exist were actually scrapped.
The big question for the small army of corporate service functionaries like lawyers, corporate advisers and private equity practitioners is how to maintain a sense of optimism in this nuclear winter which seems to be lagging longer than absolutely necessary.
For many companies in SA, business is not good, but they are hanging in there, by their fingernails perhaps. Personally, I'm astounded that we have seen so few big bankruptcies during this downturn. Perhaps the cautiousness of South African business during the early part of this century is helping to underpin corporates during this difficult time.
But for the ancillary tribe, times have been exceptionally tough. The year might have been saved had the two big deals which carried some vague promise actually transpired. But Xstrata's pitch for Anglo seemed unlikely from the start, and was deftly batted away. Bharti's bid for MTN seemed to have a much greater chance of success but that too ended in a disappointment.
These two landmark deals were really just the most obvious indicators of a really terrible year for M&A. The full figures are not in yet, but green shoots in this industry seem almost invisible, if they exist at all. Some of the most interesting figures I could find apply to the mid-market M&A scene, which is often more resilient than the mega-transaction market.
For the European, the Middle East and Africa (EMEA) region, Thomson Reuters calculates that announced deals amounted to 110bn for the first three quarters, compared to 218bn for the same period last year. The only significant M&A deal in SA this year I can recall was the JSE's successful buyout of the Bond Exchange, a bid for service industry efficiency if ever there was one.
The lack of M&A during the year is in some ways curious. The traditional reason for a lack of M&A is a severe problem with earnings visibility. But I suspect this time, the "v" shaped response of the markets was a complicating factor. The speed at which interest rates came down all over the world forced what little surplus cash there was into stock markets. This rebound took the M&A world a bit by surprise.
As a result, just as earnings were becoming visible, or at least less unclear, potential targets didn't seem so cheap anymore.
The IPO market also appears to be in a slump of grotesque proportions. This is not unnatural for a recession, but there is a valid question why it's taking so long to re-emerge. The stock of companies waiting in the wings seems to be lacking, as are compelling investment stories. Even the construction sector, so long the bright point of the IPO market, has taken a bath as doubts begin to emerge about what will happen after the Soccer World Cup.
Internationally, there has been something of an upturn recently. Globally companies raised 37,8bn in IPOs in the third quarter, according to Dealogic. This is a huge increase on the roughly 10bn raised in the first six months of the year.
The bad news is that seven of the 10 big IPOs happened in China, and that the cash raised in the first nine months of the year comes to about 49bn, a little over half the 92bn raised last year, which itself was no blinder.
But all this pales compared to the ravaged local private equity industry, which seemed so long to be holding up against the odds. A sardonic remark was passed after the biggest international leveraged buyout this year was struck last week. In the deal, buyout firm TPG and the Canada Pension Plan agreed to buy IMS Health for 4bn. The deal has been cited as an example of "green shoots" in the private equity industry.
The response was that if the Canadian government pension fund and Goldman Sachs couldn't manage to get a leveraged buyout away, then the industry could only be considered totally dead. Compare this to Wyeth's 68bn union with Pfizer earlier in the year.
Overall, the huge service industry catering for specialist corporate needs has some tough questions to answer. Perhaps the most obvious of these is whether there is room for businesses which cater for really specialist needs.
Accountancy firms which also offer advisory services seem so much better equipped to deal with downturns than specialist M&A houses, where the core accountancy business can carry the house through these market dips.
It has been interesting to see a host of hedge funds coming under legal scrutiny in the US. It seems many of these lauded specialist investment firms are struggling to weather the downturn, and the reputation of the industry, never great, is now truly in bad shape. Profits of big, full-service investment banks has been rebounding, but the rebound appears to be on the basis of improved income in their trading divisions. The service portions of their industry are stagnant at best.
All this is good reason for looking forward to next year early.
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