Current Economic Slowdown May Be Ideal Time for M&A Activity
Friday, July 11, 2003
NEW YORK, July 10 -- Companies that are avoiding mergers and acquisitions in the current economic environment may be missing a major strategic opportunity, according to a new study by The Boston Consulting Group (BCG). Mergers that take place during periods of below-average economic growth have a higher likelihood of success. And they generate considerably more shareholder value, on average, than deals taking place during periods of above-average growth. The BCG study, Winning Through Mergers in Lean Times, analyzes 277 M&A transactions that took place in the United States between 1985 and 2000. The study divides the sample between those deals that took place in a year in which real GDP growth was below the long term average of 3.1 percent for the period (so-called weak-economy mergers) and those that took place in a year when growth was above the long-term average (strong-economy mergers). Whereas the strong-economy deals in the sample destroyed value, on average, the weak-economy deals created value. After two years, the relative total shareholder return (RTSR) of the weak-economy deals was 14.5 percentage points greater than that of the strong-economy mergers-and 8.3 percentage points greater than the returns of the market as a whole. As might be expected, weak-economy mergers benefited from the lower valuations common to periods of below-average economic growth (despite the fact that control premiums held roughly constant). "But that doesn't mean that successful weak-economy acquirers are simply taking advantage of an economic slowdown to 'buy low,'" explained Jeffrey Kotzen, a BCG vice president and co-author of the study. "Because RTSR is a relative measure, it accounts for the impact of market trends. The superior performance of weak- economy acquirers means they were outperforming their industry peers during the period studied." In particular, successful weak-economy acquirers tended to buy companies with sound finances but weak profitability-and, therefore, room for creating additional shareholder value through operational improvement. If weak-economy mergers create more value, why do so many companies avoid them? The BCG report debunks some common misconceptions that have led many executives to see the current economic environment as the wrong time to make acquisitions. "The excesses of the late-1990s boom created a backlash against M&A, leading many executives and investors to dismiss it as a discredited approach to growth," said Chris Neenan, global leader of BCG's M&A practice and a co-author of the study. "Nothing could be further from the truth. In fact, periods of weak economic growth can be an ideal time for companies to use M&A strategically. This explains, in part, the recent upturn in M&A activity, as smart companies use M&A to force industry consolidation, improve profitability, and create a platform for future growth."