Time to Slow Down? - M&A and the US Economy:

The pace of M&A activity has been impressive recently, and analysts have predicted that M&A deal activity will reach record levels by the end of 2006. One factor that may change the rate of deal activity is a general slowdown in the US economy. Ready spending capital, created by strong stock prices and low interest rates, has helped make the current M&A spending spree possible. A change in the economic climate could impact further M&A spending.

According to a statement made in New York by Federal Reserve Chairman Ben Bemanke, the US economy is positioned for moderate growth, but remains at risk of inflation. Mr. Bernanke's comment dimmed hopes for an early interest rate cut, since the Federal Reserve is unlikely to lower interest rates while inflation risks are high.

The Federal Reserve's position isn't the only indication of economic challenges ahead. Home prices fell sharply in October, with the median price of a previously owned home down 3.5 percent from the same period in 2005. According to government data, the total income reported by Americans to the Internal Revenue Service in 2004, the latest year for which data is available, was $7.044 trillion, down from more than $7.143 trillion in 2000. While incomes have declined, the population has increased, so the average real income may have dropped even more than the numbers suggest.

Consumers aren't the only ones impacted by economic slowdown. According to the Commerce Department, businesses are also beginning to curtail spending on major purchases. Orders for durable goods declined in October, down 8.3 percent from September's figures. The drop in durable goods orders was greater than economists predicted and it suggests that businesses are beginning to respond to slowing economic growth.

If businesses are reigning in spending, then the pace of corporate dealmaking may also be slowed. Recent corporate M&A has been supported, at least in part, by strong share prices, which make it easier for companies to use stock as capital for making acquisitions. It its too early to tell how the stock market will react to any economic changes, but if share prices become depressed it will certainly have a negative impact on the rate of corporate acquisitions.

According to the New York Times, the US stock market saw little change after the economic statement from the Federal Reserve. The Dow Jones Industrial average dropped 6.49 points, or 0.05 percent and the Nasdaq Composite Index fell 3.32 points, or 0.14 percent, but the Standard & Poor's 500 Index rose 1.61 points, or 0.12 percent. Companies whose share prices are sensitive to interest rate changes are most likely to be affected if rates continue to rise.

Meanwhile, the private equity sector has been taking advantage of historically low interest rates to raise funds for acquisitions. While rising rates might discourage further fund raising, equity players have already amassed significant capital and are likely to continue spending, at least for the short-term.

Will the threat of slowing economic growth impact the current high pace of merger and acquisitions or will dealmakers continue towards a record year? While changes in the economy may make buyers more cautious, it is too early to call for a major slowdown in deal activity. Share prices have not been greatly hit, and interest rates are holding steady, so both corporate and equity buyers still have money to invest in deals.

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