by the equity markets. The commercial credit markets that help fund corporate growth and M&A activity should loosen and provide meaningful capital in 2010, albeit not at historical leverage levels. The challenge for every company (even those with healthy balance sheets) will be how to take advantage of the credit markets to make strategic acquisitions and generate sustained and accretive growth that may not be available organically in a still-soft economy.
Recent trends suggest there will be a good many deals available at relatively low valuations, setting up a perfect alignment between supply and demand in the M&A field. An increased availability of capital, combined with an increased appetite on the part of acquiring entities, an influx of motivated sellers, and a need to put accumulated and conserved cash to work, should mean more M&A and investment activity in 2010.
There has also been a basic shift in the makeup of the markets—public and private—exposing a gap at the midterm deal stage for emerging and growth companies. This stage generally involves increased investment and risk in many industries. So if you have IPOs at the extreme top of the liquidity pyramid, and venture capital firms at the early-stage investing phase, then M&A and private equity firms can be expected to fill in the middle. In addition to accommodating this shift, entrepreneurs and company leaders will need to decide early on what their target liquidity market is.
Working this through is critical, and it will directly affect a company’s structure, product mix, customer base, and forward-thrusting focus. Will the emphasis be on mass development, marketing, and investment to show astounding growth that will attract IPO interest? Will it be on limited customer testing to prove to strategic acquirers that a market exists for the company’s product or technology? Or will it be on building a foundation that provides for steady and conservative growth and cash flow that interests private equity or growth capital investors?
Every investor and lender today is asking, “What’s the business?” and “What’s the opportunity?” But they’re also asking an even more important question: “What will this investment mean three, five, or ten years from now?” Companies need to have solid answers to these questions in 2010 if they want to succeed in the new market environment that’s taking hold as we enter the second decade of the 21st century.