Glimmer Of Light Outside The Black Hole?

April 26, 2010  |  

These days there‘s much debate about whether or not the  economic crisis is finally coming to an end.  Some economists and financial analysts state that the economy has bottomed out and has nowhere to go but up.  Others believe that further decline lies ahead.
Analyzing economic indicators such as the stock market, interest rates and the strength of the dollar, will not necessarily resolve the debate.  But one set of overlooked numbers, mergers and acquisitions, may give us reason to be hopeful.

Why would analyzing mergers and acquisitions activity demonstrate that the economy is finally turning around?   Glad you asked.  The worldwide financial crunch was primarily attributable to a serious liquidity shortfall in the US banking system.

The story followed a predictable pattern:
(1)    Banks stopped lending money to companies.
(2)    Without capital, companies had difficulty increasing market share via purchases of other companies, hiring and retaining employees and investing in research.
(3)    Product development ground to a halt
(4)    Layoffs mounted.
(5)    Consumer spending tanked.
(6)    Companies floundered as their bottom lines shrunk.
It’s important to note that the catalyst of this entire cycle was the banks’ decision to stop lending.  A change appears to be on the horizon, however, which could alter the chain of events such that we begin to see a glimmer of light outside the black hole.

According to Thomson Reuters, US mergers and acquisitions showed signs of strength in the first quarter of 2010.  Compared to the same period last year, activity was up 59.8% to $275.1 billion.  This was the first increase in the category since 2007.

The level of mergers and acquisitions activity is inextricably linked to the ability of banks to fund such transactions.  In most cases, acquisitions need underwriting in order to proceed.  The fact that the volume has begun to increase demonstrates that banks are opening their vaults.  And with this, it appears, the end to the suffering is near.

Brandon Williams is a corporate litigator specializing in mergers and acquisitions.  He is a partner at Alston & Bird, LLP in Atlanta.  Contact him at brandon.williams@alston.com.

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