What acquisitions mean right now

Good morning everyone!  I hope that each of you had an excellent weekend.  Today I wanted to write about the high number of mergers/acquisitions that are either taking place or being discussed by businesses.  In particular, what does that mean?

First of all, let me document some of the acquisition announcements in the news currently…

• Dell is attempting to buy data-storage company 3-Par.

• Hewlett-Packard announced a rival bid for 3-Par just this morning.

• China’s Hopu private equity fund is mulling a bid for mining firm Potash.

• BHP had made a bid for Potash earlier this month that was rejected.

• HSBC bank is making a bid for a majority stake in South Africa’s Nedbank.

• India’s Mahindra & Mahindra automaker is looking to buy South Korea’s Ssanyong Motors.

• Brookfield Asset Management is looking to take over Prime Infrastructure of Australia

Etc.  These are just the major deals taking place.

But what does it all mean?  Recall that one of the signs I pointed to that the last recession was abating was the increase in the number of mergers and acquisitions that were taking place.  Businesses are investors in assets, too.  When they start bidding for the assets of other firms it’s a sign that they are getting more comfortable with the state of things.  You don’t bid for the shares of another business unless you believe several things:

1.  That the price of the business you are bidding for is at, or near its bottom; or that your stock price or other purchasing assets are at their maximum in price.

2.  That your business is made more competitive by acquiring the assets of the other business.  This means that as a business leader you are looking to the future and less worried about what has happened in the past or is happening now.

3.  That now is the time to be buying.  Acquisitions are expensive and risky.  So if business leaders felt that the state of the world was near collapse – which financial asset investors seem to be pricing into shares of businesses – they wouldn’t be buying now.  Instead they would be waiting for prices of their acquisition targets to fall.

In other words, it is a fairly bullish sign on the part of businesses to be buying right now.  The only mitigating factor could be that the acquirers do foresee a period of slow growth for their core businesses.  Therefore, acquiring another firm is one way to assure yourself of future revenue and profit growth.

It will take some time to sort through which scenario is actually operating.  I tend to think that businesses must be feeling fairly stable in order to be taking on the risk and enormous task of buying another business.

Jason