Notes from Jim Haughey

May 24 2007 6:31AM | Permalink | Email this | Comments (0) |
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By Jim Haughey

A flood of mergers, acquisitions and corporate equity buyouts is rapidly reducing the number of major corporations in the US market and prospectively the need for additional space and facilities. Business operations and brands typically remain intact at least for a while but there is a change in the top level decision making process which could be significant for capital goods suppliers, like the construction industry. Generally, the new owners are focused on the rate of return. Often, they have to be to cover their huge interest payments on money borrowed for the purchase. This means cutting marginal operations rather than investing in them. Plans for new facilities by old owners are scrapped.

The recently disappeared or soon to disappear include Alcan, Alltel, Gerber, Chrysler, Equity Office, TXU (electric utility), May Department Stores, Four Seasons Hotels and possibly Heinz. So far there has not been much consolidation in construction but the many financially stressed homebuilders and materials suppliers have a considerable risk of being targeted.

The consolidations and buyouts are being financed in part by the flood of cash coming to the US for security and the funds no longer needed for home mortgages. $30 billion deals are now routine. Increases in consolidations and buyouts have occurred at the peak of previous business cycles when corporate and private cash holdings have ballooned. This trend is neither good nor bad. It is simply part of the normal cyclical process that periodically weeds out marginal enterprises. While shifting investment capital away from less successful companies may be positive for the economy in the long-term the immediate effect is to reduce investment spending. Note that it is also happening in Europe. This wave of consolidations and buyouts may be more significant than earlier ones.

The opportunity to escape the heavy cost of Sarbanes-Oxley corporate financial regulations imposed in the post-Enron period is an added inducement to disappear from the corporate sector. Also, recent changes in tax rules, and the aggressive interpretation of tax rules, often make a consolidation or a buyout incredibly profitable to the insiders who arrange it. No let-up in reports corporate missing persons is expected soon. Each business that ceases to be a separate entity will reduce both staff and expansion plans. Commercial and industrial project starts will feel the impact of this over the next year.