News outlets which cover M&A reported the same optimistic comments three years ago. Stocks were rising so quickly that shares in public companies could be used to close many transactions. Private equity funds had access to so much capital that they could finance deals like the $33 billion HCA buyout or the $18 billion Clear Channel transaction. Those deals did not do as well as expected. The recession was part of the cause. The overpayments for the companies, brought on by potential private equity and bank profits, undermined many of the private equty forecasts within two years.

The new cycle of M&A is likely to be helped by two things. The first is historically low interest rates. The second is the rush to buy assets in Asia. IPOs in that region often soar in their first few days of trading. That further encourages bankers to believe that many companies in Asia are undervalued.

It is easy to forget when deals are plentiful that there is a large body of evidence that most mergers and acquisitions do not work. Companies overpay for acquisitions because of overly optimistic forecasts. On the other hand, combining two cultures and two complex sets of operations is often too much for even the most talented executives. Recent M&A in the pharmaceutical industry shows that not all transactions, such as the Pfizer (NYSE: PFE) $69 billion buyout of Wyeth, work. The problems each firm had due to operational difficulties and aging products could not be addressed by a marriage.

The greatest enemy of M&A has always been the economy. Asia appears like a fertile ground for M&A deals, but there are already some cracks in the Chinese economy. Inflation appears to be accelerating. The value of corporate assets may change overnight if China has to apply breaks to its economy. That would bring down the value of many companies in the People’s Republic. Bankers may argue they can  seek deals in India and other smaller countries, but China’s problems are not unique to China. Growth in the entire region could be hurt by inflation or an ongoing recession in Europe, Japan, and the US.

Bankers say every year that the number of IPO and M&A transactions will be better in the next year. History show that is not the case.

Douglas A. McIntyre

Ticker     Last         Change              52-wk Range
PEP    $71.65    -$0.06; -0.08%      $63.28 – $79.79
KO      $52.69    +$0.21; +0.40%    $49.44 – $65.59
TAP    $47.11    +$0.71; +1.51%     $38.75 – $59.51
KFT    $33.07    +$0.14; +0.43%     $28.04 – $35.29
CPB   $38.40    +$0.77; +2.05%     $30.19 – $40.05
HRL    $36.24    -$0.14; -0.38%       $33.39 – $42.77
MCD   $62.14    -$1.06; -1.68%       $49.36 – $67.00
MO     $19.99    -$0.90; -4.31%       $19.70 – $79.59
RAI     $49.54    -$1.75; -3.41%       $45.61 – $72.00
PG     $68.90    +$0.06; +0.09%     $60.05 – $75.18
CL      $76.99    -$0.07; -0.09%       $66.21 – $81.98
MRK   $31.45    -$0.67; -2.09%       $30.52 – $61.62
JNJ     $69.50    +$0.10; +0.14%     $61.17 – $72.76

Jon C. Ogg
September 29, 2008