Bloomberg recently reported that:
“Chief executive officers are so sure the economy will keep recovering they’re agreeing to prices that are 37 percent higher than the average since 2001, when Bloomberg started compiling data. While stocks in the S&P 500 are trading at the most expensive valuations in seven years compared with profits in the last 12 months, buyers are looking out to 2011, when analysts say earnings will have risen 52 percent.”
While I agree with the premise, I think the numbers can be a little misleading. Specifically, which earnings are they taking the numbers from? As we all know the past 12 months have been disastrous financial period for almost every business – except perhaps bankruptcy professionals and financial advisors. If you took the multiples and based them on past averages or against projections for the next 24 months it is probably in line with past year’s valuation multiples.
The news here though, is that CEOs are back to buying, because they feel the future will be brighter than now. I continue to believe that for the next 12-16 months it is a market for strategic buyers who have cash. The credit markets are dormant and CEOs remain reluctant to use debt. So with the increase in the stock market and confidence that the markets have hit bottom and are now improving, many CEOs are getting back into the M&A market. I predict that in late 2011 you will see a frothy M&A market – so sharpen your strategic focus and carefully evaluate your growth plans!
Multiples are down, debt is historically cheap, financial buyers are on the sidelines, the market is widely expected to improve so… (you know the phrase) if not now, when?