end of acquisition frenzy
The company valuations have gone down significantly and sooner or later people with money should step in to make acquisitions. Why is this not happenning?
Despite whatever is claimed by various advisors most of these low valuations are justified. The near-term cash flows to be generated by companies have become both lower and riskier, and the opportunity cost of spending cash has become greater.
Companies may be getting cheaper but the wealth of potential buyers has diminished as well. Cash represents only a tiny fraction of the outstanding capital. Most of wealth in the world lies in real estate, bonds and common stocks whose values have now gone down significantly.
Moreover credit is hard to come by. The previous acquisitions were mainly financed with borrowed money which is no longer available due to the massive deleveraging process.
What about those with cash? For instance what about those producers that benefited from the short-lived commodity boom? Well... Most of the accumulated cash has already dissipated and thus no longer represents a significant source of buying power. Just have a look at the Russian oligarchs. Instead of sitting on the fortunes generated during the boom period, they decided to make more investments and acquisitions. The majority of these ventures were financed by debt which was collateralized by mines and factories. Now that the cash flows generated by these assets have deteriorated, the covenants on the debt can no longer be met. That is why oligarchs are currently pleading money from Putin. Moreover those who sold their assets to oligarchs are in trouble too. For example Severstal bought Sparrows Point from ArcelorMittal for $810 million. What did ArcelorMittal do with the money? A portion of the money went as interest payments to banks which financed Arcelor’s previous acquisitions, and another portion was used towards the acquisition of new companies some of which were public. In other words, the majority of $810 million has probably dissipated into the hands of risk-averse banks and investors.
Despite whatever is claimed by various advisors most of these low valuations are justified. The near-term cash flows to be generated by companies have become both lower and riskier, and the opportunity cost of spending cash has become greater.
Companies may be getting cheaper but the wealth of potential buyers has diminished as well. Cash represents only a tiny fraction of the outstanding capital. Most of wealth in the world lies in real estate, bonds and common stocks whose values have now gone down significantly.
Moreover credit is hard to come by. The previous acquisitions were mainly financed with borrowed money which is no longer available due to the massive deleveraging process.
What about those with cash? For instance what about those producers that benefited from the short-lived commodity boom? Well... Most of the accumulated cash has already dissipated and thus no longer represents a significant source of buying power. Just have a look at the Russian oligarchs. Instead of sitting on the fortunes generated during the boom period, they decided to make more investments and acquisitions. The majority of these ventures were financed by debt which was collateralized by mines and factories. Now that the cash flows generated by these assets have deteriorated, the covenants on the debt can no longer be met. That is why oligarchs are currently pleading money from Putin. Moreover those who sold their assets to oligarchs are in trouble too. For example Severstal bought Sparrows Point from ArcelorMittal for $810 million. What did ArcelorMittal do with the money? A portion of the money went as interest payments to banks which financed Arcelor’s previous acquisitions, and another portion was used towards the acquisition of new companies some of which were public. In other words, the majority of $810 million has probably dissipated into the hands of risk-averse banks and investors.
