The Value of M&A Deals Is on Track to Plunge Nearly 50 Percent This Year to Levels Not Seen Since the Mid-1990s, Says Report by The Boston Consulting Group
But the Steep Drop Will Create Opportunities for Game-Changing Acquisitions by Predator Companies That Are Ready to Act When the M&A Market Rebounds, BCG Contends
| Source: The Boston Consulting Group
NEW YORK, NY--(Marketwire - September 29, 2009) - The value of M&A deals is on track to plummet
almost 46 percent this year, taking them down to levels not seen since the
mid-1990s, according to a report published today by The Boston Consulting
Group (BCG).
Only 12,700 transactions were conducted in the first six months of the year
-- a drop of 17 percent compared with the same period in 2008. The
cumulative value of these deals amounted to a mere $681 billion. If the
number of transactions for all of 2009 turns out to be double the figure
for the first six months, the drop would take the number of deals down to a
level last witnessed in 2004.
But in "Be Daring When Others Are Fearful: Seizing M&A Opportunities While
They Last," BCG contends that the financial crisis will provide
opportunities for game-changing acquisitions by companies that are ready to
make the right strategic moves when the M&A market returns to growth.
"We expect a window of opportunity offering attractive takeover prospects
to open soon," says Alexander Roos, a BCG partner and coauthor of the
report. "But only those companies that have prepared themselves for action
will be able to benefit from these favorable opportunities. We have already
seen some of our smarter clients making preparations in recent months."
The report, part of BCG's annual series on the M&A business, analyzes more
than 5,200 transactions to identify the factors behind successful deals,
with a special focus on the period since the start of the subprime crisis.
BCG's extensive research shows that the most promising opportunities as the
M&A market returns to growth will be the acquisition of distressed
businesses with further financing needs. In addition to businesses divested
by larger distressed groups, targets in the coming period are likely to
include a significant number of private-equity portfolio companies unable
to refinance their debt.
But not every company is in a position to make acquisitions. BCG's analysis
of a sample of companies in the S&P 500 shows that about 20 percent are
"predators," ready to take on the risks of a deal, while another 20 percent
are "prey" -- so weak and vulnerable that they must focus on survival or be
swallowed. The remaining 60 percent have the potential to be either
predator or prey -- and BCG estimates that up to one-quarter of these
companies could become predators by rigorously strengthening their finances
and reshaping their businesses.
The M&A Market
Although the value of M&A transactions fell steeply in 2008, the number of
deals was still higher than in much of the past decade. However, the
bankruptcy of Lehman Brothers in September 2008 prompted a significant
further decline in activity that continued into the first half of 2009.
The return to life of the global capital markets in the second quarter of
2009 increased the availability of financing and reduced its cost. Debt
issuance rose, especially in investment-grade debt, and the number of
secondary-equity issues increased sharply.
A BCG survey of the world's largest and most active investors found that
they want companies to be ready to capitalize on M&A opportunities when
they arise. "Investors want management teams to take advantage of these
adverse conditions in order to improve their position in the competitive
landscape whenever possible," says Roos.
Strategies for Smart Predators
The report says that the following factors significantly increase the
chances that the acquisition of a distressed target will succeed:
-- The predator is above average in profitability and more profitable than
the target
-- The target has financial problems but has not yet run into operating
difficulties
-- The predator is bigger than the target
-- The target is in a different sector from the predator
Conventional M&A strategies must be updated to deal with much more
uncertainty during the current financial crisis, the report says.
"This time more than ever, it will be important for predators to actively
stress-test their own businesses and those of potential targets throughout
deal preparation, execution, and integration," says Jeff Gell, a BCG
partner and coauthor of the report.
To receive a copy of the report or arrange 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
businesses. Our customized approach combines deep insight into the dynamics
of companies and markets with close collaboration at all levels of the
client organization. This ensures that our clients achieve sustainable
competitive advantage, build more capable organizations, and secure lasting
results. Founded in 1963, BCG is a private company with 66 offices in 38
countries. For more information, please visit www.bcg.com.