Maintaining Perspective

If you read the headlines, there is certainly a feeling of panic in the markets.  This past Monday, the DJIA dropped more than 700 points in one day.  The market swings are unprecedented.  Despite all of this volatility, middle market M&A is still alive and well.  As investment bankers to the middle market, we’d be lying to you and ourselves if we didn’t notice some impact on our business, but due to the nature of the size of our transactions, we are somewhat protected from the major turmoil.  We are confident that despite current market volatility, buyers and sellers still want deals to take place and we can help make them happen.  Why do I feel so strongly about this? 

In my 40 years as an investment banker, I have lived through three pretty bad economic environments so it is important that I am able to maintain perspective in this current environment.  To what do I compare the current situation?

1. The mid 70’s - The 70’s was the worse decade of American economic performance since the Great Depression.  The first oil crisis began in October of 1973, spurred by the Arab-Israeli conflict, when Arab nations declared that they would no longer ship oil to nations that supported Israel.  Lines at gas stations often required a wait of more than one hour.  The U.S. was embroiled in the Iran hostage crisis and following the Iranian Revolution, the country was faced with a second oil crisis.  It was a very complex and challenging time in the capital markets.  Inflation ranged from 6% to over 13% per year, and interest rates were in the double digits, with prime at 21.5% at its climax.  Investment bankers were really handicapped for several years and deal closings were very far and few between. 
   
2. Black Monday October 1987 - The Dow Jones had the second largest one-day percentage decline (more than 22%) in stock market history.  Comparatively, the drop this past Monday of over 700 points was a decline of just over 7%.  Black Monday was a very sharp market correction of a bubble in the debt markets.  Almost one month later, it was over and we were back on track with business as usual.
   
3. dot-com bust of 2001-2002 - This was a mild yet rather lengthy period of recession following the Internet bubble of 1999 and 2000 which was exacerbated by the tailspin after the 9/11 terrorist attacks.  However, this bust was very isolated in the tech sector and it especially affected tech stocks valuations.  Interestingly, over 50% of the dot-coms have survived.  During this period, Covington Associates turned our focus to healthcare and expanded our expertise to business services and consumer and industrial services so we were not so dependant on tech sector deals.

So what does all this mean for the current environment?  The present day situation seems more extreme than any of the others I have experienced.  The 1970’s didn’t see the wholesale failures of major financial institutions coupled with a freeze in liquidity and the ability to borrow without government intervention.  The capital markets and IPO markets are practically non-existent today.  Companies are going to have trouble accessing capital and many have experienced this already. 

In our world, we see strategic buyers still playing out there.  They have the cash and they can take advantage of the recent changes in the marketplace.  We are still closing deals and in fact just closed a $78 million dollar M&A transaction this past Monday as the markets were falling.  We see the impact of today’s economy significantly affecting financial buyers particularly those who used a high degree of leverage, and we just don’t yet know where the debt markets will settle out.  The economic news isn’t good, but it is an interesting time and has our attention.  We kept our head (and head count) down in the high flying days when we did 22 deals in a year.  Now we are at half that pace but still managed to be the most active Boston based investment bank for the fourth year in a row.  Our business will prevail and it is now that the senior level attention and experience we provide is even more important to, and appreciated by, our clients.

Chris Covington is Founder and a Managing Director at Covington Associates.  He can be reached at 617-314-3950 or ibankerblog@covllc.com.  

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