With economic conditions in 2009 set to get even tougher, expect to see a swathe of "mergers of necessity" as companies in financial trouble are snapped up by larger, stronger players.
Forget traditional mergers and acquisitions and credit-fuelled leveraged buyouts. Activity in 2009 will be all about buying troubled assets, according to predictions from the U.S. Transaction Services group of consultants PricewaterhouseCoopers.
"The deal landscape will be dominated by distressed investments across sectors including financial services, automotive, consumer products and retail," said PwC's Robert Filek.
"Troubled companies will look to align with larger, stronger players in order to survive, creating the perfect storm for mergers of necessity."
With the number of U.S. businesses filing for bankruptcy on the rise, PwC's Greg Peterson said that private equity stands to make a comeback, with firms already raising funds to invest in these assets. According to Private Equity Intelligence, distressed funds raised a total of $36.8 billion in the first half of 2008, a clear sign of major acquisition activity to come.
"Historically, it has been during a downturn when strategic buyers and private equity firms have their best buying opportunities, yielding the best returns," Peterson said. "The key will be the availability of financing."
Of course, some sectors will see more activity than others. According to PwC, consolidation will be particularly marked in the U.S. financial services sector, with small mid tier banks finding it increasingly hard to maintain their independence. Insurance companies will also look to shore up financial strength through consolidation, while asset management companies are likely to continue to see interest from acquirers.
In the technology sector, that strong players will "take advantage of once in a decade low prices to pursue strategic portfolio fill-ins as well as cross-sector transformative deals." And with venture capital and IPO funding sources effectively closed, smaller players will increasingly look to partnerships, alliances and all out acquisitions for exit, further feeding the pipeline.
In consumer products, PwC predicts that "many high quality companies may get thrown out with the bath water", presenting real opportunities for patient corporate buyers.
Retail is expected to offer particularly rich pickings for distressed investors as consumers slash spending – although for those retailers who survive, the cost of prime real estate will plunge.
Healthcare is earmarked as another area to watch – although for rather different reasons. With the Obama administration determined to expand access to quality and affordable health insurance, modernize healthcare and reduce costs, PwC says that opportunities will emerge across the healthcare sector.
And then there's what PwC terms "the wild card". Could public company valuations fall so far that it makes sense for them to turn private? "Consider public companies where the stock price is equal to the cash value of their shares: at some point valuations are just too compelling and these transactions could emerge."