Looking For The Positive Spin

December 8, 2008

Even for a glass half full guy like me, it’s been tough lately to find something good to say about this market. What seems like the Neverending List of Negative News seems to grow on a daily basis. Just yesterday, the NY Times Dealbook referenced a report from Bernstein Research concluding that M&A activity is going to drop 25% next year and even more in 2010 before it bottoms out. Yes, the report said there are select industries that will continue to see healthy deal flow, but for investment banks and others whose business is linked to transactions, the general outlook for the next 18 months is about doing less with less.

On a relative scale, the mid market continues to be a safer place to play than the large market, and that’s unlikely to change even as 2009 gets worse. And since we’re comparing, I would argue that versus their public counterparts, the story is arguably a bit more hopeful for private equity-backed companies.

For one, PE-owned companies don’t face the risk of a stock-market dive that erodes investor confidence and buying capital overnight. Moreover, the fact that financial sponsors can’t realize ROI until they exit their investment—dividend recaps are pure fantasy at this point—means they’re more likely to think through the impact of layoffs and other cost-saving moves on the future value of the business.

On the flip side, however, many PE-backed companies are highly levered at a time when cash is disappearing. Buyers who invested at the peak of the market—sometimes at double-digit multiples—could end up making ugly, short-sided decisions to recoup what is now a bad investment.

So perhaps we're just dealing with varying degrees of pain.  But while that pain is unavoidable, the obstacles we're facing now will undoubtedly lead to some good. For those PE firms who pride themselves on operational expertise—and actually have it—this is their time to shine. Some of those hard decisions that we put off when things were going well will finally be made, and who knows? Maybe they’ll prove to be the ones we should've made all along.  As the old saying goes, success is often born of adversity. 

Adam Reinebach
adam.reinebach@sourcemedia.com