-- "Downturn deals have a higher chance of creating value for buyers than
upturn deals." The BCG study team found that downturn deals -- those
executed during recessions or periods of slow (less than 3 percent annual)
growth -- are "twice as likely to produce long-term returns in excess of 50
percent and, on average, create 14.5 percent more value for shareholders of
the acquirer."
-- Divestitures have a higher probability of success for buyers than the
purchase of entire companies and can "create substantial value" for sellers
as well. Sellers' overall returns from divestitures are 1.5 percent, on
average, rising to 1.7 percent (a 13 percent increase) during downturns,
"suggesting that it is a good idea to clean up portfolios during
downturns."
-- On average, 57.5 percent of buyers of divested assets generate
positive returns, compared with 41.7 percent of buyers of entire companies.
The study team was led by BCG's global sector coleaders of M&A Jeff Gell, a
partner in the firm's Chicago office, and Alexander Roos, a partner in
BCG's Berlin office, and Jens Kengelbach, a principal in the firm's Munich
office.
The report not only focuses on the financial results of past M&A deals and
the conditions that may have contributed to those results -- along with
comparisons to current conditions -- but also offers advice to prospective
buyers and sellers on what to look for in a deal and how best to pay for
it.
The BCG experts found that corporate buyers today are uniquely positioned
to take advantage of the tough economic times, with both "the cash and
profitability" to make deals. "The average cash surplus of the S&P 500, for
example, is 56 percent higher than it was in 2000, when M&A values and
volumes reached record heights."
Other findings:
M&A Activity Defies Economic Woes: While the total value of M&A
transactions decreased 17.8 percent between the first and second halves of
2007, largely due to private-equity firms' retreat in the wake of the
credit crunch, the total number of transactions has remained relatively
stable and is comparable to the 2000 peak during the last wave of M&A
activity. The principal differences: deals are now smaller, on average, and
corporations are taking the lead, the corporate share rising from 73
percent to 85 percent of dollar value and private equity's share falling
from 27 percent to 13 percent.
Private-Equity Firms Are Not out of the Game: With some $300 billion of
unallocated funds, private-equity firms could return in force to the M&A
market.
Downturns Create Opportunity: A recession would inevitably depress M&A
activity because deal values and volumes are closely correlated with GDP.
The report indicates, however, that a downturn offers huge opportunities
for both buyers and sellers to create superior shareholder returns from
M&A.
Focus on the Core Business: The key to a successful divestiture acquisition
is the purchase of assets that strengthen the core business. Such purchases
earn nearly 24 percent higher returns than divestiture purchases in noncore
areas.
Divest in Distress: "Companies that divest when they are in financial
difficulties send a powerful message to the capital markets that they are
committed to restructuring their portfolios, often triggering a sharp rise
in shareholder returns."
Size Matters: "Acquirers' returns from divestitures are systematically
higher when the relative size of the asset is substantially higher for the
buyer than for the seller. In deals where the divested unit represents more
than 50 percent of the value of the buyer and less than 10 percent of the
value of the seller, acquirer returns (6.5 percent) are almost three times
higher than in deals where the relative sizes of acquirer and seller are
similar (2.2 percent)."
To receive a copy of the report or to schedule an interview with one of the
authors, please contact Eric Gregoire at +1 617 850 3783 or
gregoire.eric@bcg.com.
About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm
and the world's leading advisor on business strategy. We partner with
clients in all sectors and regions to identify their highest-value
opportunities, address their most critical challenges, and transform their
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countries. For more information, please visit www.bcg.com.
Contact Information: Contact: Eric Gregoire +1 617 850 3783