After the last few years when large amounts of money were lent too easily and to too many investors, the market has jarringly corrected. Merrill Lynch states that approximately 35 debt deals have been cancelled or restructured in a recent five-week period, and “The Economist” reports that it is not only risky borrowers that have been affected; globally, only $98 billion of investment-grade bonds were issued in July 2007, the lowest since August 2004. The stock market reacted with alarm as well, in part because it was counting on leveraged buy-out activity to continue to push up stock prices.
While the equities market has begun to decouple from the credit markets and recover from the once-seeming crisis, the latter have come to a virtual standstill. Credit spreads—the premium that riskier borrowers must pay over government debt—have risen since June 2007, and confidence certainly has not been restored. Three-month dollar London Inter-Bank Offer rates (LIBOR) rose to their highest level since January 2001. As the yield on the U.S. 10-year treasury note falls to a five-month low and volatility on the U.S. Treasury Market remains at a three-year high, Moody’s has said that it could take up to six months for the credit markets to return to normal.
One of the largest consequences has been the slow-down of merger and acquisition activity; leveraged buy-outs worldwide have stalled as banks have balked at strict terms and risky structures. The easy-credit market had for years fueled buyouts at an unprecedented rate, but “The Wall Street Journal” reports that executed deals worldwide reached only $222 billion in August of this year, the lowest monthly total since July 2005—and nowhere near the $695 billion in April and $579 billion in June 2007. While the M&A market is eternally cyclical, experts foresee deal volume down significantly over the next year and activity like the last three years perhaps not returning for some time.
Automation industry market leaders have already expressed their continued search for strategic acquisitions, as evidenced by ABB Ltd.’s recent 2007—2011 strategy report stating that the company “continues to assess potential acquisitions that fill technology or regional gaps, create strategic and financial value and can be successfully integrated.” This follows an active third quarter with Honeywell’s acquisition of Enraf Holdings B.V., Actuant’s acquisition of BH Electronics, and ITT Corp.’s acquisition of International Motion Control.
Most businesses will be able to survive the credit squeeze. Creditworthy borrowers will still have access to debt (albeit at higher rates), and many do not show a real need to borrow. The Federal Reserve reports that U.S. firms are generating $987 billion internally, which is greater than the $973 billion they are investing in new plant and equipment. This is particularly true in the automation industry; companies in the Cronus Automation Index currently have a total cash position nearly three times capital expenditures for the prior year. While the tightening credit markets have changed the landscape of the overall economy for the short term, all signs point toward the automation industry weathering the storm.
Charles R. Carson, email@example.com, is a Managing Director of Cronus Partners LLC, www.cronuspartners.com, an investment banking firm specializing in automation technology.
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