More than $5 trillion has disappeared from the value of public companies in the first three weeks of January. Many markets are 20% or more below their highs — the informal definition of a bear market.
It’s a frightening moment, particularly for the banks, but it’s also inlaid with investing opportunities for savvy distressed buyers. Here are a few thoughts on the outlook for the distressed M&A market, given last week’s volatility:
1. Non-US corporate buyers, as contrasted with sovereign wealth funds, began intently looking at US-based companies once the shoe dropped in the leveraged market late last Summer. Many of them decided to shelve active pursuit of US targets because of a perception (since borne out) that the US equity markets were overvalued — while it may seem hard to believe, the Dow was hovering around 14,000 just a couple of months ago (October-November). If recent trading proves the adage that corrections usually bottom out in the 15-20% decline range, expect non-US buyers to make their moves in advance of the US equity markets, and perhaps the US Dollar, starting to move back up in the Spring.
2. Distressed buying opportunities abound in numerous sectors directly affected by the bursting of the real estate bubble–we’ve obviously seen a lot of major long-term equity investments in commercial and investment banks, arranged corporate marriages and other acquisitions in mortgage-related businesses, and are beginning to see higher debt default rates and likely will see Charter 11 filings by some builders and construction products supply companies, etc.
3. This is part of the natural order of things, whether auto manufacturers in the 1920’s (there were over a hundred of them in the US alone) or e-commerce businesses in the 1990’s–an area gets very hot, tons of capital flows into it, some of it is burned and people come back in Round 2 with more, second round capital comes back in to build a Phoenix from the ashes. That’s what WL Ross seems to be doing in mortgage servicing, Warren Buffet in mono-line insurance, etc.
There’s plenty of capital for this, and I expect that it will dominate Q1 2008.
Bob Profusek is chair of mergers & acquisitions at global law firm Jones Day.