In Current Market Environment, Companies Face Rare Opportunity to Do Transformational M&A Deals, Says Report by The Boston Consulting Group
Analysis of More Than 5,200 Deals Since the Start of the Crisis Confirms That Returns From M&A Are Much Greater in Downturns Than They Are in Upturns, Especially From Deals Involving Distressed Targets
NEW YORK, NY--(Marketwire - October 8, 2009) - With equity values stabilizing and debt
markets returning to life, companies face a rare window of opportunity to
do mergers and acquisitions that will reshape industries and create new
leaders, says a new report by The Boston Consulting Group (BCG).
For those with the financial wherewithal, current conditions offer a
"once-in-a-lifetime opportunity," say the authors of "Be Daring When Others
Are Fearful: Seizing M&A Opportunities While They Last."
"Time is of the essence. The capital markets are gradually reopening, and
growth is returning in economies that had previously fallen into
recession," write the authors. "When the window of opportunity flies open,
the prizes will go to those that have grasped their position and prepared
themselves for the surge in M&A. With the clock ticking, there is no time
Earlier BCG research established that the returns from M&A are much greater
in downturns than they are in upturns. The firm's latest research -- based
on an analysis of more than 5,200 M&A transactions since the start of the
subprime crisis in the late summer of 2007 -- confirms that insight.
Moreover, it shows that some of the best opportunities in the last two
years have been acquisitions of fundamentally healthy but financially
distressed companies. Returns from distressed M&A were higher for both
acquirers and targets (2.4 percentage points higher and 30.1 percentage
points higher, respectively) in 2008 than in downturns during the previous
The authors also found, after analyzing more than half the companies in the
S&P 500, that about 20 percent are "predators," ready to take on the risks
of a deal. Another 20 percent are "prey," so weak and vulnerable that they
must focus on surviving the downturn. The remaining 60 percent have the
potential to become either predator or prey. These businesses must assess
their financial and market positions as a matter of urgency to ensure that
they make the right strategic moves.
"For the majority of companies that are neither predator nor prey, the good
news is that up to one-quarter of them can transform themselves into
predators before the M&A market surges," says Alexander Roos, a BCG partner
and coauthor of the report. "To do so, however, they will have to
strengthen their finances and reshape their businesses -- to seize M&A
opportunities when they arise."
Who Are the Predators and the Prey?
The most active acquirers now are financially sound companies with strong
balance sheets, high profitability, and sufficient cash to capitalize on
the weaknesses of competitors. They can take advantage of the current low
valuation levels to transform their industry and improve their own position
within it, according to BCG.
Transactions over the last year have often been in industries such as
finance and automotive, which are on the ropes. But there are also
opportunities for large-scale transactions that could transform the
competitive landscape of other industries, including currently robust
sectors such as pharmaceuticals and utilities.
Other potential predators include private-equity (PE) firms, which have
around $500 billion at their disposal, and sovereign wealth funds, which
were sitting on assets of more than $3 trillion before the crisis started.
Many of the targets for M&A in the current crisis have been in sectors hard
hit by the credit crunch, such as financial services and the automotive
industry. But there has also been M&A in relatively healthy sectors, such
as pharma. Companies whose shares have fallen the most will be seen as
potential prey. Other targets will be businesses divested by larger
companies and PE-owned portfolio companies.
The Clock Is Ticking -- Be Ready for Action
Since the start of the crisis, companies have tended to focus inward. Cost
cutting and restructuring have been seen as the overwhelming priorities,
necessary to maximize cash flow, strengthen the balance sheet, and ensure
survival. But now conditions are beginning to turn.
"Investors appear to recognize that today's extraordinary circumstances
present once-in-a-lifetime M&A opportunities on which companies should
capitalize," says Roos, citing a recent BCG survey of investors and
analysts. "They want companies to use the crisis to strengthen their
competitive position -- even if their stock price takes a short-term hit.
Investors expect companies to do what is necessary to secure their
financial viability, but they are concerned that potentially game-changing
moves will be neglected for fear of missing quarterly earnings-per-share
The report cautions, however, that conventional M&A strategies must be
updated to deal with the heightened uncertainty in a downturn as severe as
the current one.
"With earnings set to reach their lowest levels in the second half of 2009
or the first half of 2010, existing multiples may be too high," notes Jeff
Gell, a BCG partner and coauthor of the report. "Valuation of targets
requires a good deal more than analysis of their financials and simple
multiple calculations. Executives need to do real business planning and
explore worst-case scenarios. But for the predators, after they've done
their homework, they may see the best deals they will see in a generation."
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
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