Barter Up: The consensus among market pros is that the climate is right for a surge in stock-for-stock deals

Dealmakers waiting for conditions to perk up have largely been disappointed in the first quarter of the year. According to research from R.W. Baird, middle-market deals sank by 25% during the first three months of 2008, with the drop largely attributed to the tightened lending markets. But while the uncertainty has impacted highly leveraged transactions, some believe the conditions could accommodate a resurgence in stock-for-stock deals.
What may make a difference is that many companies today remain cash rich, with healthy balance sheets. And cash deals will always be preferable to the somewhat fluid valuations of stock transactions, says Jean Cayanni, senior managing director at RSM EquiCo Capital Markets. Reflecting the buyer reticence, he notes: "Very often a large company doesn't want to issue stock because it dilutes its own shares."
Typically stock deals are considered educated bets on the future, and ideally, a stock-for-stock merger strives to make the most of undervalued stock. "Let's say you are Company A and your stock is undervalued and you sell it for cash. On the other hand if you get stock in Company B, it's likely that company B is also undervalued. Therefore when the market comes around, you are going to get a pop," Cayanni describes.
Cash-strung companies during the last downturn were forced to turn to the stock-for-stock structure in order to get deals done. While declining earnings numbers in the current market would seem to hint at that trend's second coming, Cayanni believes such a movement has yet to take place.
"In 2003, 2002, several companies were selling leveraged balance sheets - you cannot pay cash, therefore you issue stock," Cayanni says. "Those are things that can occur again, although I'm not sure it's there right now."
The Baird numbers seem to back Cayanni up. For the year through February, all-stock transactions made up 9.1% of all middle-market deals compared to 12.4% in the year ago period. But at the same time, the market hasn't yet entered a recession, at least officially, although most prognosticators concede a contraction has likely already begun. If that's the case, stock prices will indeed begin to reflect that.