Monday, 30 March 2009

First Light of US Economic Improvement?

Last week in the US we may have seen the first light of some economic improvement.

The US has a big knock-on effect to the rest of the world so this could be good news for all.

Three important measures of US economic performance all moved in the right direction last week:

1) both existing and new home sales rebounded by around 5% in February after a very poor January
2) consumer spending rose for a second consecutive month
3) durable goods orders, a leading indicator of investment, rebounded in February after dipping sharply in January

Perhaps more important than the data was the feedback following publication of the detail on the US Treasury’s financial rescue plan, the Public-Private Investment Program, or “P-PIP”. This was met with resounding approval by financial markets.

The S&P 500, for example, staged a strong rally to recover from what had been the lowest level since 1996. The plan aims to use a combination of public and private funds to buy up ‘toxic assets’, untradeable loans and securities that have weighed upon banks’ balance sheets and impeded lending. Many private sector players have already confirmed that they will participate in the scheme, raising hopes that it will be successful.

What does the current economic situation do for the mergers and acquisitions markets is so far not clear. Many owners will look at the low interest rates they can obtain on cash investments as a reason to hang on to their business assets. However, there is mounting pressure on some companies as the credit crunch squeezes them hard. If they can’t obtain credit many more companies will go under this year.

Companies sitting with cash in the bank will look at profitable and stable companies more than ever as a good place to put their money. A profitable company that can be acquired for instance 5X EBITDA despite the higher risk must look more attractive than the current interest rates returns being achieved by just parking the cash? Where else will you get a 20% return?

This ignores the benefits that the right strategic acquisition/s could do to leverage value from the acquirers existing business. Right NOW could be an excellent time to raise your company above the size of your closest competitors. Like the old boxing says;

“A good big un usually beats a good little un

All Photographic Images on this blog are Copyright of Mark Edwards and should not be published without permission

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