“Deal-making Comes Alive”
In an article published last week in Forbes, some experts have declared that deal-making is back, citing some large recent transactions:
- Dell’s $3.9 billion acquisition of Perot Systems in September
- Walt Disney’s $4 billion tie-up with Marvel in August
- Exxon Mobil’s $41 billion all-stock buy of XTO Energy in December
- AIG offloading its Asian life insurance business to the U.K.’s Prudential for $35.5 billion
While these deals certainly make headlines, I don’t think they do much for main street American business and more importantly, I don’t think you can declare that merger and acquisition activity is back based on these deals alone. The article argues that these deals signal change and explains that companies are looking to invest the cash they accumulated through the significant cost-cutting measures in 2009.
However, what the article fails to address is the significant strain many companies still feel, those that did not have the luxury of accumulating significant cash reserves through cost-cutting. On the contrary, for many businesses, cost-cutting was not a strategy employed to accumulate cash — it was a drastic measure taken to ensure survival. As such, these businesses are not in a position to simply spend the cash reserves to restart the engine, they need their market to rebound.
Perhaps some of the rebound can come from the larger players who have these cash reserves through a “trickle down” process. But most of this growth will drive from continued consumer confidence and growth. So, yes, these large deals are important to signal a sea change, but the real recovery is going to require a much larger economic and environmental change over time.
Perhaps the best nugget of the article came in the last paragraph: “In his latest letter to Berkshire shareholders, Buffett said, ‘Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.’ Absent that drastic measure, his advice remains ‘Don’t ask the barber whether you need a haircut.’”