Market Overview

Despite President Bush’s denial in a Thursday press conference that the economy is headed into a recession, the American public and Wall Street remain skeptical about future economic performance. With major stock indexes seesawing and consumer confidence dropping to its lowest point in five years, public sentiment seems to point to an expected recession.

The Conference Board’s recently released consumer confidence numbers showed consumers claiming that business conditions are bad have risen from 20 percent to 21.8 percent in February, following some distressing economic numbers.  The Commerce Department released durable goods numbers for January that showed a 5.3 percent decrease, the first drop in factory orders since October, and revised readings of fourth quarter economic growth confirmed the anemic 0.6 percent previously reported instead of the revised 0.8 percent growth expected by economists. 

Addressing the current economic uncertainty, Federal Reserve Chairman Ben Bernanke reiterated the challenge in managing rising inflation and slowing economic growth.  The Fed has cut its key interest rate several times since September, lowering the rate to 3% from 5.25%, and is widely expected to lower rates again.  However, recent economic reports have made that decision a far tougher one for the Fed, as January’s core wholesale inflation, which excludes food and energy, posted a 0.4% increase, the biggest increase in 11 months. The 1% jump in wholesale prices followed a 0.3% decline in December and was the biggest one-month increase since a 2.6% gain in November. With the January increase, wholesale prices have risen by 7.5% over the past 12 months by 7.5%, the fastest increase in over 25 years.

Deal Overview

Strategic buyers are stealing the M&A headlines back from the large buyout shops, as strong corporate balance sheets continue to drive M&A activity. Headline grabbing offers, like Microsoft’s $44.6B bid for Yahoo! and Reed Elsevier’s $4.1B bid for Choicepoint, were recently the domain of private equity funds, but the ongoing credit crunch has curtailed the large private equity club deals.  Buyout firms are still active in the market, with Hellman & Friedman recently announcing it had acquired Getty Images for $2.4 billion, but the pace has slowed since 2007.

With the cost of commodities seemingly on a never ending climb, commodity producers have seen an increase in recent M&A activity. Rio Tinto recently rejected BHP Billiton’s improved offer of $147B, concluding the offer significantly undervalued the company.  Rio Tinto also took advantage of the record run in gold prices to raise funds to pay down debt incurred during the purchase of Alcan in 2007, selling its stakes in Cortez Gold Mines to Barrick Gold Corp. for $1.7B and Greens Creek to Hecla Mining for $750M.  Talks about a $90B takeover of Anglo-Swiss mining company Xstrata by Brazil’s Vale, the world’s largest iron ore producer, are rumored to have hit an impasse, but if completed would form the world’s largest mining company.