Smart managers do more deals in a downturn

Nov 28 2008 by Nic Paton Print This Article

It's not a strategy for the faint-hearted, but managers who hold their nerve and aggressively pursue mergers and acquisitions during an economic slump can reap the vast rewards when things pick back up.

According to an analysis by consultancy firm Deloitte, cash-rich companies can almost double their shareholder return by completing deals during an economic slump.

It looked at more than 100 of the largest completed acquisitions over a ten year period, from 1996 to 2006, and found a two-year return of 12.1 per cent above average for those British businesses that announced deals negotiated in a downturn.

This compared with just 6.1 per cent for those that announced deals in a more buoyant market.

Andrew Curwen, global head of transaction services at Deloitte, said: "If we look back in history, it's clear that some very successful deals have been done in periods of economic stress.

"For example, in the late 1990s, during the Asian financial crisis, those well-capitalised buyers who invested in their M&A capability picked up some relative bargains," he added.

"Clearly, access to finance and timing is critical and smart companies are now taking another look at the market and positioning themselves to move quickly," he continued.

"Opportunities to buy assets from stressed or distressed owners can, in the current environment, appear at a moment's notice," he added.

While it is logical that lower prices at M&A can offer greater returns down the line, what was intriguing about the analysis was it appeared that acquisitions in a downturn offered twice the differential return of those completed in a period of stronger growth, added director of practice development and research author Leor Franks [crct, not Leo].

"This may encourage an increase in deal activity as those organisations that are ready and able to buy increasingly take advantage of opportunities," he said.

"In fact our recent CFO survey showed that for the first time since the beginning of the credit crunch, CFOs have a positive outlook for M&A activity levels," he added.

Of course, to get good shareholder returns you have to make a success of both the M&A itself and the subsequent integration, something that it is clear many management struggle to do.

Back in July, for example, a study published by the Journal of Business Strategy concluded that M&As often ended up destroying leadership continuity within top management teams for at least a decade following the deal, because so many senior executives quit.

And in February, research by consultancy firm Hay found it was little wonder nine out of 10 European M&As failed to deliver on their objectives, because senior managers took 74 days to put in place new management teams.

The same consultancy a year also argued that nine out of 10 mergers failed to achieve their stated objectives, with virtually all of UK mergers and acquisitions failing in some way.