I see two major sea changes coming due to the current financial crisis.
1) When things normalize in credit land (and it has already started normalizing, albeit very slowly), there is going to be a slew of M&A activity.
2) The next commodity bull run will be mind numbingly explosive.
Let me start with point number one. I think this whole crisis has shaken small companies to the core. Suddenly having the rug pulled out from you or realizing that your credit can be pulled at any time potentially threatening the life of your company or watching your company’s stock fall 50-75% just from panicked investors has been an eye opening experience. I’m guessing a lot of small to medium sized businesses are going to be looking for larger companies for protection or will start merging with other smaller companies to gain scale and size. I think this will start to happen in q1 or q2 of next year after a couple of mergers are announced before year end.
The second point is based upon the printing of money and debasing of currencies from every major government in the world, combined with the fact that we are still in relatively short supply for most commodities once the world starts to grow again, I think the next run in commodities will be enormous. And trust me one day the world economy will grow again. Unfortunately for the world, production was just getting ramped up to meet demand when the bottom fell out on commodity prices and worse the bottom fell out for financing. I’m guessing many levered commodity companies are going to go under or will not be producing from projects any time soon due to current market conditions. Further, it has become very, very expensive to start new projects from copper to iron ore to oil. The cost of lifting these commodities from the ground has soared, causing the break-even to be much higher than in the past. All of these factors will put a floor on commodity prices much higher than in past. And when the next run starts look out.
The 1970s show us what can happen. Oil went from $1 to $4. Then pulled back to $2, before going to $20. Could $750 oil be in our future by 2015? I think its more likely than $20 oil.
Your second point is spot on. I hope your first point is true, for personal reasons, but it’s not as readily apparent to me.
I think the combination of the new world of illiquidity, volatility and tighter credit will force smaller firms to merge or sell out. Its just not worth it to be public, especially with the regulatory burden as it has been in the past.
Agreed on both points. Especially as it applies to Hemisphere GPS–where the public company expense and .
Admin:
Are you inferring that Private equity will be buyers of small firms since “it is just not worth it to be public”. Or do you think public companies will merge as well
TIA
Could be. If so, it will be a boon for the surviving investment banks.
ndl11, I think companies no debt will find ways to take themselves private, whether with private equity or good old fashioned debt or partners of some kind.
I also think there are many large private firms that can gobble up small firms as well.