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Monday, February 4, 2008

Low rates + stagnant markets = growth via acquisition?

Sometimes its useful to step back and look at the overall picture.

Despite the recent slowdown in the economy, many companies in the tech space are flirting with margins just off their record highs. Cash positions are strong. The credit markets are certainly tight but most of that centers around real estate concerns. The consumer is in retreat. Growth is going to be hard to come by in this scenario.

The stock market has corrected pretty substantially, particularly in tech -- the semiconductor index has retreated from 550 to 375 (32%) over the last 6 months. Valuations are obviously significantly lower.

Federal Reserve policy the last few years has been to flood the system to fix problems and doesn't seem to account for the subversion of the environment they create. When Y2K looked like a threat, they flooded the system with liquidity and created a bubble in speculative stocks. When the market failed to recover and the economy was clearly going to be in trouble in the aftermath of the reality that profits would never justify the valuations, they lowered rates again to avert an economic collapse. In doing so, the fed inadvertently created a real estate bubble as cheap money always finds a vehicle. Now that's backfiring.

Now the fed has lowered rates an unprecedented 125 bps in the last 2 weeks. It's likely they'll ease the real estate market woes. It's also likely they'll inadvertently create yet another financing boom. Banks can now borrow at the window with impunity and money is cheap. They need to offset this real estate crap somehow. I would think they're going to feed the corporate merger beast next.

Larger corporations have their pick of smaller acquisitions to make here. They're not going to grow organically, its a retrench period; they will consolidate positions in existing markets and find new growth drivers. Acquisitions are probably the only real growth driver here... and a more appropriate action than waiting for the economy to improve.

Money always finds a way to get spent.

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