Quarterly numbers paint a picture, and a picture tells a thousand words. Behind the data, the guidance, the revisions and surprises, there is a message, and the message is roughly as follows. I paraphrase: “As the U.S. economy underperforms and its prospects remain uncertain, it is good for a business to have global operations, it is good to have cash, and it is good to improve cost efficiency.” More concisely: “As local revenue growth underwhelms, it’s good to find other ways to increase earnings.” And for good measure: “Better keep some cash nearby, just in case, to be on the safe side.”
The season started with Intel and has moved swiftly on with FedEx. Both companies gave the market a lift, and both noted the importance of overseas demand. There were countless examples of the same characteristic with similar statements in between, and as these corporate results were being posted, as their subjects were rewarded with stock price upticks, U.S. jobless claims continued to drift around recessionary levels. Chalk that up to next quarter’s improved profit margins, and chalk it up to cash preservation. This is all consistent with the paraphrased messages above.
I touched on possible Wall Street vs. Main Street consequences of such financial profiles and strategies in a previous article here. Between Wall and Main, however, around where the two streets intersect, there is another location called M&A. This connects to both streets and feels the traffic patterns on both sides. When earnings repercussions are considered by Wall Street, or more precisely, are considered by corporations with an eye on Wall Street, M&A will be considered in the same light. In turn, M&A strategies will impact Main Street through the transference of opportunity into or out of the local economy.
From the perspective of M&A, the picture of recent quarterly results confirms trends we had already begun to see. The message is more or less this: “The importance of cross-border deals has escalated, as has the importance of highly strategic, highly accretive, and efficiency optimizing acquisition targets (that could hopefully also drive some revenue growth).” These are some tall orders and quite a checklist to follow, a lot of qualities to fit into one deal, but such selectivity goes a long way to explain M&A volumes that continue to underwhelm, even as corporate earnings are growing.
And then there are balance sheet issues, and the value of cash balances as previously noted. Taken together with a relative unavailability of leverage capital to augment corporate cash in the consummation of transactions – as corporate credit, despite improved earnings, has not yet begun to freely flow – the mood for big deals, for bidding up, has been and is likely to remain tempered. In short, as long as economic conditions and financial priorities stay as they are, we should expect smaller deals to be prioritized, requiring a lesser tapping into savings balances.
The questions that still remain – sifting through these narrowly focused and often difficult to reconcile transactional parameters – have to do with the impact of these upon the broader economy. Deals focused on cost efficiency should reduce local job creation, as should a push towards overseas operations. On the other hand, a tendency to preserve cash and pursue smaller transactions could be a counterbalance to such tendencies. Taken as a whole, these two key aspects – job creation and cash preservation – stand at the center of an economic crisis that was triggered by excessive leverage and risk taking, and has been extended by lingering unemployment. These are the aspects that will be most important to watch in corporate deal patterns ahead, at the intersection of Wall and Main, where M&A lingers.
