M&A Madness Rings in 2001 With Deafening Quiet (Cont'd)

This is the second part of Alex Troy's column on the M&A slowdown. To return to part 1, click here.

Certainly, the high-yield market's lack of appetite for new credits is limiting merger activity. Of the 11 deals counted, only one, Forstmann's purchase, was a leveraged buyout. And half of the purchase price was financed with equity, significantly higher than a traditional LBO. In fact, the recent deals don't suggest any particular trend other than how completely the M&A machine's momentum has been arrested. And it's not a one-month phenomenon. The total volume of deals in the last two months of year 2000, $113 billion, was even lower than 1997's final two-month total of $117 billion. For some context, the final two-month totals in 1998 and 1999 were $203 billion and $249 billion, respectively.

The risk arbitrage community has had absolutely nothing to do so far in 2001. One veteran arb who has been in the business since 1988 said, "It feels like 1991 all over again." That's a scary observation, considering the last recession ended around March 1991 at the earliest. (The National Bureau of Economic Research acknowledges that picking the trough of that recession was particularly difficult because some economic indicators declined through the end of 1991.)

Is It All Academic?

In the past four years, the most recent month that looked this bad was September 1998, when a total of $23 billion in deals was announced. That month was the peak of the Long Term Capital crisis, which paralyzed markets worldwide. Looking back, I think the September '98 deal market was predicting a recession, wrongly as it turned out, thanks largely to Fed Chairman Alan Greenspan's timely rate cuts.

While some academic literature shows a positive correlation between the business cycle and the level of deal activity, no economist I spoke with knew whether the deal cycle leads, lags behind or coincides with the economy. That brings us back to the $64,000 question (isn't that expression dated?): Is the depressed level of deal flow predicting a recession or telling us we're already in one? It's likely indicating a slowdown, or more ominously, forecasting the recession of 2001.

I'm no economist, just a guy trying to make money on mergers and takeovers in the public markets. I'll leave it to the academics to decide whether the ebb and flow of the deal business can predict turns in the business cycle. But I smell trouble. The Fed was late in making a 50 basis point cut and needs to cut rates immediately. Otherwise, the big deals of 2001 will be Chapter 11 reorganizations.

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