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Markets Down, Takeovers Up?

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The recent pummelling of the stock market has changed the playing field for many firms. Priced for a prolonged recession (or worse), the stock of many firms is now priced assuming an enterprise value of zero (i.e., below book value).

Such an environment is typically rife for a spate of corporate takeovers. But with stock prices down across the board, many acquirers don’t have the currency of a rich valuation to pull off a good-sized corporate purchase.

Even with such a dearth of natural buyers, however, there are some potential buyers. A number of firms, including Oracle (ORCL), have dedicated pools of capital for strategic purchases. But in most cases, the targeted acquisitions are small and typically do not trade on public exchanges.

Likewise, buyout funds that have managed to avoid the problematic deals of the go-go early 2000s have the dual advantages of both a large cash stockpile and a vast selection of rock-bottom firms from which to choose. However, well positioned LBO players are hard to find in the current environment, although they certainly exist.

That leaves the relatively small number of publicly traded companies that can finance corporate acquisitions with secondary stock offerings. These secondaries (mainly from REITs and large banks) have consistently been coming to market at sizable discounts, as investors require a higher-than-normal rate of return to participate. Even so, the current valuations are so cheap that firms are more than justified to offer their stock at below-market prices.

Most of the takeovers in the financials space have been regional banks being purchased by larger banks looking to boost their deposit base. Morgan Stanley (MS) is among the holding companies that are attempting to build their deposit base via acquisition. At current valuations, we expect the types of firms being purchased to expand.

The Monthly Index Report for December 2008


Nov 08



S&P 500 Index*


-23.1% -39.0% Large-cap stocks




Large-cap stocks
Nasdaq Comp.*




Large-cap tech stocks
Russell 1000 Growth




Large-cap growth stocks
Russell 1000 Value -7.2% -23.2%


Large-cap value stocks
Russell 2000 Growth




Small-cap growth stocks
Russell 2000 Value




Small-cap value stocks




Europe, Australasia & Far East Index
Lehman Aggregate 3.3%



U.S. Government Bonds
Lehman High Yield




High Yield Corporate Bonds
Calyon Financial Barclay Index**



11.2% Managed Futures
3-mo. Treasury Bill*** 0.1% 0.3%


All returns are estimates as of November 28, 2008. *Return numbers do not include dividends.

** Returns are estimates as of November 27, 2008.

Ben Warwick is CIO of Memphis-based Sovereign Wealth Management. He can be reached at [email protected].


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