The above quote is an understatement as it relates to the economy. The cloud of uncertainty continues to hang over us like a heavy fog. While we receive reports of an improving economy, the recent negative unemployment report provides us a mixed message. Many believe that the geopolitical issues are causing Americans to turn cautious.
Economists wonder if the world controversies are masking some “essential” issues that are weighing the economy down. (They have to “wonder” about something or they have no job).
What could that fundamental issue be? Perhaps the over-capacity in our industries? While many companies have pared down their employment forces, most have not “destroyed” their excess physical capacity.
So how does this relate to mergers & acquisitions or corporate finance? We believe that the economy is entering a heightened period of “creative destruction”. Capitalism is built on destroying unproductive assets, which allows the remaining assets to become more productive or re-deployed in more efficient means. This destruction occurs primarily through mergers & acquisitions, or financial restructuring.
While the public market has experienced the painful process of recognizing the loss of equity value, the private market has been delaying this realization. But you cannot run forever. The financial reality eventually catches you and makes you acknowledge the losses.
This is one of the reasons we believe that M&A activity will increase over the next year. Our recent survey of private business owners in Florida confirmed this belief. In addition, many companies with improving balance sheets (liquidity) are starting to hunt opportunistically for acquisition targets. Equity funds flush with unspent cash are looking aggressively for investment opportunities lest they face the unpalatable alternative of returning the funds to investors (I think not).
Although the investment banking industry is suffering through one of its worst periods, we experienced growing momentum in 2002. This energy has continued into this year. Our current client relationships are focused primarily on sell-side engagements. However, we are witnessing increased client engagements related to obtaining growth capital.