Two interesting articles to point your attention to this week. The first is from this week’s edition of The Economist (see Waiting for Armageddon). As I’ve been anticipating for more than a year:

After several heavenly years, in which bankruptcies fell to record lows, going bust is back.

Also, The Economist comes to the same conclusion that I did regarding analysts’ predictions about defaults and bankruptcies (see Analysts Formally Predict Uptick in Defaults). That is, they’re way too optimistic.

…most forecasters expect it [the default rate] to rise sharply over the coming months. For instance, Moody’s, a ratings agency, predicts that the default rate will rise to 5.4% by the end of this year…That is a relatively optimistic prediction, for it would merely return the bankruptcy rate close to its long-term average after an abnormally trouble-free period, and it assumes only a mild recession in America.

So far, this recession looks anything but mild to me.

In another corroboratory piece of evidence that the financial climate for businesses is challenging (to say the least) right now, I add a recent CFO magazine article about how M&A activity is quickly grinding to a halt (see How Weak is M&A).

First quarter lethargy in the U.S. reflects…a 71-percent plunge in deals by financial buyers…volume in the first quarter has now fallen to the lowest level in four years.

Private equity firms, for example, seem to have nearly evaporated in the market due to the credit crunch. In fact, many seem busier trying to rework or walk away from previously agreed upon deals…Meanwhile, strategic buyers, suffering from their own slowdown, seem unwilling to step up and buy one of their rivals. That was the case this weekend, in fact, when Aloha Airlines [was] unable to find a qualified buyer or win financing to keep aloft.

These stylized facts are consistent with the sentiment that I’ve expressed on this blog for months now (see M&A Activity on the Decline and Masters of the Obvious). Obviously, it’s not just the private equity jig that’s up (see Private Equity: The End of an Era), but strategic buyers are few and far between these days too.

And speaking of increases in bankruptcies, from the CFO magazine article, we can add Aloha Airlines to this year’s illustrious list of bankrupt firms. This makes my going list of notable bankruptcies so far in 2008:

• Wickes Furniture (furniture retail)
• Sharper Image (retail)
• Lillian Vernon (retail)
• Sirva (moving services)
• Blue Water Holdings (auto)
• Buffets Holdings (restaurants)
• Aloha Airlines (airline)

Just one question: Does Bear Stearns belong on that list???

This entry was posted on Wednesday, April 2nd, 2008 at 8:19 pm and is filed under Corporate Strategy. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.