The Return of Simplicity in M&A

When the smoke clears and the dust settles, what does the Wall Street meltdown mean?

We’re back to cash is king. The Golden Rule has been restored: he who has the gold, makes the rules. It’s a return to old-fashioned investing. Companies with strong balance sheets and lots of cash are moving in to make acquisitions. In some cases they are paying 100% equity — no money down, no debt whatsoever, a completely unleveraged transaction. And they’re able to really have an impact on businesses that they weren’t necessarily able to touch before.

We certainly saw that with Warren Buffett. He had the gold, and he set the rules. He got a real sweetheart deal with Goldman Sachs. Granted he has money at risk, but he was able to get a highly preferential deal structure that a year ago he wouldn’t have been possible. It’s all about the cash position. The people that have dry gunpowder right now will do very well. Companies with little debt and good fundamental financials have the opportunity right now to really make a move and become even stronger.

A few things are going to follow. First, valuations will fall — it will be interesting to see how valuation companies (the experts who calculate what a company is worth) adjust to the new climate. Second, cash-rich buyers will be able to acquire companies that others cannot. And there is a third consequence to this whole upheaval: we will see a new layer of transparency and simplicity in the markets. Acquisitions in recent years have been largely driven by financial engineering. Now we’ll see a change in acquisition strategy. Today, the question hanging over possible transactions will be: “Does this make good business sense?” That’s a sea change in the M&A world.

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