Five Reasons Not To Panic

August 14, 2007

Being the informed professionals that you are, I’ll assume that everyone who reads Merger Mogul is acutely aware of the ongoing credit crunch that began with subprime mortgage lending woes and most recently jumped across the pond to infect select Europeans. To put it in perspective, I typed in the phrase ‘credit crunch’ yesterday on Google News and got almost 13,000 hits, which is, impressively, more than double the hits for the phrase ‘Britney Spears’.

That’s not to the say the credit crunch isn’t worth talking about. But for today’s column, I thought I’d share some of the credit cloud’s silver lining, at least when it comes to the middle market. This comes from discussions with a random selection of mid-market professionals. Please feel free to agree, disagree or request further investigation.

1. The mid-market doesn’t live and die with mega buyouts. Just because a firm like KKR or TPG is having problems selling high yield debt to finance their buyouts doesn’t mean the average mid-market transaction is going to be impacted. Sure, there’s a potential trickle-down effect here, but let’s remember that some of the mega buyouts in the spotlight are looking to sell billions of junk bonds and leveraged loans on the backs of companies that most people agree they paid too much money for. That has little or no relation to financing a mid-market buyout where someone paid seven times.
2. Private equity firms are still sitting on a ton of cash. As most of us know, a private equity firm has to spend its committed cash within a certain time frame. Thus, waiting on the sidelines for an extended period of time isn’t an option—unless the buyout firms start giving back their commitments, which is highly unlikely, especially if prices start to fall and companies potentially become better bargains. Buyout funds raise money so they can buy companies. Period.
3. In the short term, there could actually be a rush to sell. Don’t cry for investment bankers—at least not this year Their pipelines are still healthy, and for anyone who’s been toying with the idea of selling, now is probably a good time to put up a ‘for sale’ sign. Purchase prices probably won’t be this rich for long.
4. Banks have to lend to make money. Just because risk has increased doesn’t mean banks can afford to sit on their hands. Terms might change, but banks cannot afford to turn their backs on private equity firms who, unlike one-off strategic buyers, will invariably become long-term clients.
5. Growing by merger is still easier than growing organically. This was a point Hiter Harris made earlier this summer that really resonated with me, in part because I saw it first-hand at my acquisitive prior employer. A down market doesn’t change this, and for well-capitalized private equity firms, it could actually spur more M&A activity.