Market Overview

The widely anticipated rate cut announced during the Fed’s December meeting failed to impress Wall Street, as many investors were disappointed the cut was only a quarter-point. Major stock indexes declined after the announcement, indicating that investors may have priced a larger rate cut into the market. In published minutes the Fed acknowledged slowing economic growth caused by the continued housing correction and softening business and consumer spending, but seemed to take a less dire view of nation’s economic performance than did the public.

Driving much of the economic angst in the general market is the continued housing slowdown and rising energy prices. New single family home construction activity dropped to its lowest level in 16 years in November, to an annual rate of 829,000.  In addition, applications for building permits fell for a sixth straight month, dropping by 1.5 percent to a seasonally adjusted annual rate of 1.15 million units, the slowest pace for building permits since June 1993. 

The continued rise of energy prices also weighs on economic performance and according to recently released government projections, although long term prices are expected to decrease, there will be little benefit to economic growth. According to the Energy Information Administration's 2008 long term energy outlook, oil prices are expected to average about $67 in 2010, almost 13 percent higher than last year’s projection of 2010 rates. The projected increase in oil prices has caused the EIA to scale back its economic growth projections from 2.9 percent annually to 2.6 percent.

Deal Overview

With the recent credit crunch putting a damper on private equity mega-deals, strategic buyers have been generating much of the recent M&A news.  However, a recent Ernst & Young report predicts that private equity deal flow will remain strong in 2008, due in part to the large amount of uninvested private equity capital. The report highlights distressed investment funds and the financial services, media and entertainment and energy sectors as major drivers of 2008 deal flow.

Despite the general slowdown in M&A activity, the energy sector continues to be an active deal market.  Oilfield services provider National Oilwell Varco Inc. recently announced it has agreed to buy drilling-products maker Grant Prideco Inc. for about $7.37 billion, further consolidating the drilling sector.  This deal comes shortly after Transocean Inc., the world's largest offshore drilling contractor, announced an $18 billion deal for competitor GlobalSantaFe Corp.

This month’s metric looks at the breakdown between private and public acquirers of privately held U.S. companies in the last 24 months.  As the exhibit clearly illustrates, over half of all buyers are privately held companies. This observation may be somewhat counter-intuitive to business owners of privately-held businesses. In Mirus’s experience, many entrepreneurs presume that their privately held company will be bought by a select handful of larger, publicly traded peers. In reality, many smaller businesses find an exit through sale to another privately held company that may not have been on the short list.

There does not appear to be great variation in this metrics across industry segments. The proportion of public buyers is slightly larger for software firms than any other industry.  This result is not surprising, as large public software players such as Oracle, SAP, Microsoft, and IBM have driven significant consolidation in this space.

Sources: CapitalIQ and Mirus analysis. Copyright 2006, Mirus Capital Advisors, Inc.  All rights reserved. Mirus Capital Advisors does not assume any liability for errors or omissions.