10:43 AM MDT | May 27, 2011 | By VINCENT VALK
We're not back to the good – or bad, depending on your perspective – old days of 2006 and 2007 in the M&A and capital markets, but we've come a very long way from the depths of two years ago. Such a long way, in fact, that I've heard talk of a new bubble.
At the M&A panel at Houlihan Lokey's Global Industrials Conference next week, Tim White, managing director at GSO Capital Partners, a division of Blackstone, sounded some notes of pessimism. "I don't think a lot of lessons have been learned [from the downturn]. I think a lot of the same mistakes are being made," he told the audience. The capital markets – which have, undeniably, been hot – were a particular cause for concern on White's part. He noted that the total inflow into the capital markets so far this year has been greater than the annual average, historically. White called the capital markets "overheated," and said that cash looking for safe returns will move back to treasuries once today's rock-bottom rates start to rise.
Another thing to note about the capital markets is that a lot of that activity has been refinancing, as opposed to new deals and leveraged buyouts (LBOs). This has help shore up companies' balance sheets.
Those shored-up balance sheets have been the catalyst for M&A. "Over the last 18 months the economy has continued to improve and you see stronger balance sheets and CEOs in position to make their next move," Tracy Stover, global chemicals leader with PriceWaterhouseCoopers (PwC; New York) told me earlier this week. PwC's first-quarter chemicals M&A report described a healthy M&A market that should remain so, barring a new economic calamity.
It's true that companies have lots of cash, and they need to do something with it. M&A, of course, isn't the only thing they can do with that money; personally, I'd like to see more hiring, and a number of companies have launched share buybacks. Private equity firms also have lots of cash, and they need to buy companies, or at least minority stakes, with it, that's what they do. There's money everywhere right now.
That simple fact is kind of strange, though. We're pretty much back to the days of easy money, though perhaps not back to the days of very, very easy money. There are some legitimate reasons for this, such as recession cost-cutting leading to higher profit margins. But with raw materials costs on the way up again, even that may not last. And – here's why I'd like to see more hiring – consumer demand remains soft, and the housing market remains abysmal, at least in much of the West. As governments around the world make the 180-degree turn from stimulus to austerity, we could be entering dangerous territory.