M&A Strategies in Uncertain Times: A Global Perspective
Opinion
That M&A plays a major role in the success and long-term viability of companies cannot be disputed. Yet, during the times of downturn, M&A takes a backseat perhaps for wrong reasons. The facts bear it out. According to research, about 60-70 percent deals closed during the slowdown actually perform better than those done when the going is good.
The slowdown that ensued during 2008 was unlike any in the recent past. And we are yet to see some broad directions. Expectedly, M&A deals were among the major casualties of this downturn, though it is moot point whether M&A in 2008 is comparable to liquidity-fueled 2007 or even 2006 for that matter. According to Thomson Reuters’ estimates, global merger value topped about US$2.89 trillion, the lowest since 2005. Significantly, about 1,100 deals were cancelled. Except for China and Brazil, deal volume slumped in all major regions with the US witnessing a 38 percent drop year-on-year.
What’s more the forecast for 2009 is equally grim. Experts estimate about 30 percent fall from 2008 levels to US$2 trillion. This, when Fortune 1000 companies are estimated to be sitting on US$1.4 trillion in cash and private equity funds planning to raise nearly US$ 900 billion in 2009. So, will the deals really taper off? Not likely.
Given the cash positions of both corporates and PE funds, it is unlikely that we will see a long lull. Once the global economy stabilises, the deal making should return with vengence. When stock markets get pummelled on account of liquidity and demand dips, the valuations of good companies transit from being attractive to compelling. Cash-rich companies that are looking for sustainable advantage in terms of growth and profitability can find no better time than a recession to make their M&A moves. When the economic outlook is poor for organic growth, accretive M&A deals look appealing. Only two factors apart from strategic fit will hold back the decision:
1) will the target companies survive the ensuing recession, for no acquirer likes to have a dud on their hands.
2) In the era of deleveraging and the credit being at a premium, how do they structure the financial closure?
Once a decision for an acquisition is made, the normal drill of target screening, due diligence, deal closure and integration follow. These are some of the issues this edition discusses in detail.
One thing is for sure. Right now, everyone is biding their time and waiting for the macro-economic situation to improve. When that happens, we should see a frenzy of deal making. Next four to six quarters should be interesting to watch.
This article is extracted from Aranca M&A Masters Global 2009 Dossier. To download the entire Dossier, click here.
