As the global economy continues to fall into what could be a prolonged recession, deal activity over the near term is expected to continue to slow.
According to Steve Krouskos, Americas Accounts and Growth Leader for Ernst & Young LLP's Transaction Advisory Services, "The deal volume drop-off, brought about by a faltering economy and a frozen credit market, has also brought corporate valuations down to their lowest levels in many years."
Significant buying opportunities for cash-rich corporations, Private equity (PE) firms and sovereign wealth funds looking to scoop up strategic assets at bargain prices are the upside of these low valuations.
Only 44% of companies are performing at successful levels
Cash-rich, performing companies are in the minority, according to a recent Ernst & Young poll of almost 500 respondents. Only 44% of companies are currently performing at what they would characterize as "successful levels," as measured on the Ernst & Young LLP's Corporate Stress Pendulum. This pendulum looks at how the current economic climate is affecting companies. Companies classified as operating at successful levels according to the pendulum are trying to assess supplier stability, optimize their portfolios and execute opportunistic acquisitions. For the subset of well-capitalized companies with strong balance sheets, the time is right to think about acquisition opportunities, as valuations are low and, in certain industries, well-run companies can be had for pennies on the dollar.
Fifty percent of those polled would characterize their current operating levels as stressed or distressed. They are also divesting business units that are not aligned with core competencies and competitive advantages. For these companies, liquidity management and cost reduction is crucial to staying afloat in these uncertain times. They're also focused on capital restructuring, and some are closing business units or facilities.
"Companies that are performing well and have cash on hand will be able to take advantage of current market conditions to scoop up valuable, strategic assets in 2009," said Krouskos. "It's a simple case of the strong getting stronger and the weak getting weaker."
In 2009, those companies lacking a strong liquidity position will be focusing on reversing that trend. "Companies experiencing financial stress should implement defensive strategies now to avoid significant issues," said Dave Williams, US Leader for Restructuring Services, Ernst & Young LLP's Transaction Advisory Services.
