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How Bankers Are Gearing Up For a Rebound in the M&A Market.

Article Excerpt
High-profile m&a activity remained in a slump at year-end with buyers and sellers scissored by the sluggish economy, laggard stock market, tight credit market, and corporate governance scandals. Major investment bank pros say that despite these distractions, corporate clients remain focused on the strategic stakes involved in rewarding acquisitions. Although no one is betting on the timing, they may start executing on these strategies with greater gusto around mid-year.

M&A: Do you expect any of the new regulatory mechanisms growing out of the accounting and research scandals to affect mergers and acquisitions or any of the services that your firms provide? Has the new setup put you under any additional legal or other pressure as far as the advice that you provide your clients on the buy and sell sides is concerned?

Selig: In the aggregate all these things have been distracting, not only for the Street but also for our clients. That has probably had the most pervasive impact on the level of activity, rather than any single regulatory or other issue.

Corporate officers are spending a lot more time thinking about these issues than they have in the past. Board members appear to be dramatically more cautious, especially as it relates to issues around audit committees, for example. But I think that there are so many other economic and other factors that are influencing levels of m&a activity that regulatory issues per se have not had a dramatic dampening impact.

Rimland: Governance has had an interesting effect on m&a with respect to the independence issues related to the New York Stock Exchange and Nasdaq rules on having independent directors. As we talk about putting two companies together and allocating board seats, that has certainly put a slight wrinkle on the issue of putting two boards together.

Other than that, we face a general tone issue and I think that we are working our way through it. Knock on wood, we seem to have dealt with Sarbanes-Oxley issues fairly well in the last quarter. But it is still going to take some time to get that issue through the system.

Cotter: Sarbanes-Oxley is a good thing and helpful to what we are trying to do in the capital markets in the United States and literally around the world. Our industry has been impacted so dramatically over the course of the past six months. We were impacted by what someone in a recent conversation that I had referred to as the financial services sector's equivalent of "the perfect storm."

We have been impacted by a downturn in economic activity both here and in Europe, ongoing terrorist activity, and the threat of war, as well as the overhang of what that implies for the markets. Finally, there are the questions that have evolved around corporate credibility and the integrity of the capital markets.

It is difficult for Congress to really effect the first two issues very dramatically but certainly they were capable of at least acting quickly with regard to those issues regarding the integrity of the capital markets and what is going on in Corporate America. I think they did so with Sarbanes-Oxley. There is a debate now underway among the SEC, Nasdaq, the stock exchanges, and others in terms of who is going to actively implement much of that change. But fundamentally it is good. The sooner we get beyond a lot of these issues, the better, and Sarbanes-Oxley goes a long way to pushing us beyond those problems.

Katzman: I would take a little different tack and say that what has happened makes it harder to be a public company. The cost of compliance is up and there are the regulatory changes that have been mentioned.

This may mean that LBO buyers may find an IPO a less attractive exit than selling the business. There is more responsibility to being a director of a public company, and that may change, from an m&a perspective, how people do business. The new regulations also may make it more difficult for foreign companies to list here, which impacts the way they look at making acquisitions in the U.S.

In addition, we have had a lot of discussions with companies focused on the question of whether they should remain public. For smaller companies, it takes a lot more effort, time, and money to be compliant, and they are not necessarily being rewarded for it because of the way that the markets are treating them. Therefore, more companies are thinking about going private.

Rifkin: The nature of board meetings has changed dramatically over the last 12 months. I have had clients complain that their board meetings now consist of four hours of audit meetings and only one hour of other business. That is not an environment that is conducive to our business of mergers and acquisitions. There are a lot of reasons why m&a activity is down, but certainly what is happening in the boardroom is a big part of it.

Posternack: The near-term distractions are clear. Boards of directors are spending enormous amounts of time with their internal and external counsel reviewing the implications of the new provisions and determining how they are going to work in the new environment. With those distractions, the amount of time they can devote to new initiatives, and m&a in particular, is clearly reduced.

We are working with a company that is in the middle of late-stage negotiations, which they in effect put...

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