Shift in Size, Strategy for M&A Players

While adjustable rate mortgage woes have slowed global mergers and acquisitions activity, the market still has life. The landscape is seen moving from...

While adjustable rate mortgage woes have slowed global mergers and acquisitions activity, the market still has life. The landscape is seen moving from private equity deals to smaller ones with more opportunities for strategic players.

This story first appeared in the November 19, 2007 issue of WWD.  Subscribe Today.

This was one of the conclusions at a recent panel discussion held at WWD’s editorial offices. The participants were: Diane D’Erasmo, executive vice president of commercial banking at HSBC; Joyce Greenberg, managing director of Financo Inc., and Rohit Manocha, managing director of Tri-Artisan Partners. Emanuel Weintraub of his eponymous consulting firm moderated the discussion, which centered on recent strategic acquisitions and the possibility of private equity players being pushed aside. The participants also talked about M&A market flow, deal volumes and the possibility of a recession looming on the horizon, as well as the impact of slowed consumer spending.

“The strategics have learned a lot of lessons in the last couple of years. If you look at the Joneses, the Lizes and the Kellwoods of the world, what we have seen is that you can’t stand still and you can’t not grow,” said Greenberg. “I think they have been frozen out of the auction market by the aggressive private equity funds, and they are going to take advantage of the time and space to make those acquisitions.”

Greenberg predicts fewer transactions closing, and that those deals previously in the works will likely close at lower values than originally anticipated. “I think these deals will close, there will just be adjustments,” said Greenberg, adding, “We’ll see more and more transactions between strategic investors rather than just financial, private equity players.”

With respect to cheap, easy credit not being as readily available as it once was, Greenberg cited a number of ramifications to this shift. She said large capital investment transactions for financial investors and private equity funds are very difficult to get closed today, whereas the middle market still seems able to get financed, albeit at much lower prices and multiples. As for nonfinancial buyers, Greenberg said a lot of strategic investors stayed out of the deal business in the last year or two, refusing to participate in auctions because they felt they couldn’t compete with private equity funds.

“The apparel industry is all about change, and this market has really seen a lot of different changes in the last 20 years,” said D’Erasmo. “With the banks that are providing the financing, [they] need to do business [and] are going to look at what makes sense. Again, depending on the size, they will look to the fundamentals of the company and they will look to the fundamentals of the deal, and if the deal makes sense, they will finance the deal. If the deal doesn’t make sense, things will have to change.”

Manocha said deal volumes are coming down substantially, and, although the main problem remains that financing is tighter, he said the paradigm of value has changed. “Things aren’t worth what they were worth two months ago,” said Manocha. “The biggest thing that a lot of people outside of our world don’t understand is that it’s really a credit crunch, it’s not an economic crunch. So, when you’re sitting there and you own a company and you think it’s worth $100, and now it’s worth $80, [it] takes quite awhile [for that] to sink in.

Manocha believes distressed transactions require a lot more pain on everyone’s part because it’s harder to finance them. His concern is whether strategics will take advantage of the buying opportunity, because history has shown that when they should be buying, they typically don’t buy, he said. In addition, Manocha said the decreased deal flow will actually bode well for the industry and market.

“You will get financing, even in three months, [even though] we might have to go to more banks. Some banks will want a new customer so [financing] will happen, but the harder part is to convince a board that a stock that was worth $30 three months ago is now worth $24. That’s hard for a board to understand,” he added.

With the recent federal interest rate cuts, many financial experts seem confident that this could help keep the M&A market afloat, especially D’Erasmo, who said the impact of this on her client base would be celebratory.

“Money is cheaper so it’s a positive impact on my clients. It can only be a positive impact. What we have found over the years, and again going back over a long period of time, is that people don’t do well because of where interest rates are, people do well because they know what they are doing. They have a goal, they have a vision, and they can execute what they’re doing,” said D’Erasmo.

Manocha said long-term rates will remain at a pretty good level, although he speculated that a recession might occur due to the upcoming election year, the unpopularity of the current administration and their need to gain momentum, as well as the next administration’s desire to make an impact.

“I think the federal government has no other choice, and if they start cutting rates, specifically when they cut once, they don’t just cut once, they keep on cutting. You can argue that that’s cheap money and that leads to more abuse,” said Manocha. “But the reality is that long-term rates will never be high rates, and they will not be high rates for a long period of time.”

Greenberg, who disagrees with Manocha, thinks the government has made it clear that they will not allow a recession to occur, especially in an election year, although the retail environment in middle America seems to be suffering.

“What we’re hearing from our clients is that the retail environment in middle America is tough, it’s very tough,” said Greenberg. “People are very nervous, retailers are nervous, and business is hard. So middle-American retailers are reliant on something special today, like a Vera Wang, something to get them excited, that’s why everyone is looking so nervously, looking at how Martha’s doing at Macy’s [and] how’s Vera doing at Kohl’s. You need some excitement today because the consumer isn’t running into stores, so you need a store that gives them that confidence,” said Greenberg.

“I think it will help consumer spending,” said D’Erasmo, highly in agreement, “but I think the consumer has been resilient to a lot of things and the consumer has been spending. I think that if there’s something they want, they will find a way to buy it.

“While retail hasn’t been spectacular, it certainly has been OK and we have seen luxury expand. We see middle America positioning to buy luxury goods and we have seen accessories expand because maybe that’s more affordable, so I do think the consumer will continue to spend dollars,” said D’Erasmo.