Monday, May 19, 2014

Cooked Geese and Boiled Frogs

We have discussed how the worst deals are done in the best of times. It reflects the pro-cyclical nature or M&A-merger waves. This in turn highlights a pro-cyclical risk appetite of managers. Deal volume and prices plummet during a market downturn. Some managers complete some smaller transactions which are successful, and M&A interest is rekindled. An improving economy and rising stock market add fuel to growing volumes. Herding in the final stages of the cycle completes the process.

Unfortunately as we get further into the cycle, deals become more expensive and somewhat more risky. The changes at first are small and frequently ignored - like frog placed into a pot of water which is slowly heated. Attached is a recent American Banker Article on the subject which provides more details on the phenomena in the debt markets.

Preventing your goose from being cooked requires a disciplined process. This is especially true for large complex deals with high levels of Shareholder Value at Risk due to high premiums and integration issues.


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