An interesting point from The Conglomerate on the potential for increased activity in mergers and acquisitions (M&A).
It might give some hope to law, finance, and accounting students reading this post.
A few very brief comments from my side:
Business is a Jungle
The business world is like the wilderness. The strong survive and the weak perish.
During difficult economic conditions, well managed businesses retrench and bide their time until the situation improves. The poorly run companies, or those that suffer despite their best efforts, are in little position to rebound on their own (mergers) or to defend themselves from takeover attempts (acquisitions).
When you are managing a business, make sure that you are prepared for lean times. And that you can come out of any down economy in a position to take advantage of the opportunities.
Debt versus Equity
Another thing to note is expected use of debt to finance M&A activity.
This is reasonable due to the extremely low interest rates for borrowing.
But it is also due to the relatively low share prices most companies have experienced over the last few years.
For example, the S&P 500 was sitting at 1230 on August 8, 2005. Today it sits at 1120. In the United Kingdom, the FTSE 100 closed at 5346 5 years ago. Today it stands at 5376. For most developed nations, there has been little or no growth in equities over the last 5 years (note though that there have been ups and downs during the 5 years).
Had equity prices been strong today, I expect we would see much more M&A financing via shares rather than debt. When financing by shares, the share value is the currency.
For example, in early January of 2007 Citigroup was trading at about USD 55 per share. To finance a USD 550 million acquisition with equity, they would need to transfer 10 million shares to the acquired company’s shareholders. But if Citigroup had to delay the transaction until early January of 2009, their shares would only have been worth about USD 5.
In 2009, Citigroup would have had to transfer 10 times the number of shares to complete the identical deal. That extra 90 million shares would have diluted Citigroup stock to a much greater extent than in doing the deal in 2007.
Always remember that the equity of a company is a form of currency. When the share price is high, companies will use equity to finance deals. When equity prices are low, they will look to other methods that may be available.
But as prices are relatively low and interest rates are attractive, debt should be the predominant method for financing deals over the short term.
Learn to Identify Phases of the Economy
Understanding economics and the phases of the economy is extremely important.
By knowing which phase you are currently in, you can properly plan for the future. This will give you an advantage over others who are reactive and not proactive in their efforts.
Success in business, or even in finding a job, is all about identifying opportunities and taking advantage of them before others do.
Make certain you maximize your potential. Develop a sense for how the economy cycles.