While the average M&A transaction destroys value for the acquirer, returns from deals done during downturns are higher on average over the short and long term than returns from deals done in upturn years, according to a new report by The Boston Consulting Group (BCG).
The report, titled "Accelerating Out of the Great Recession: Seize the Opportunities in M&A," found that the average deal dilutes value for the acquirer, not only over the period around the time of the announcementâ€•as demonstrated by previous BCG researchâ€•but also over the two years that follow the announcement. Despite this, about 40% of all M&A transactions create value in both the short and the long term, with acquisitions during downturn periods outperforming those in boom times by 12 percentage points.
The study also found that while the short-term return around the time of the announcement of a deal is generally a good predictor of the long-term value that it will create, it can occasionally underestimate the value creation potentialâ€•or even misjudge it as value dilutive.
Although the number and value of deals fell in 2009 for the second successive year, the M&A market appeared to bottom out last year. While the number of deals fell by 14%, and their value fell by 44%, the decline that began with the insolvency of Lehman Brothers in September 2008 ended in the second quarter of 2009. The value of M&A deals turned upward in the second half of the year—though it leveled off in the first few months of 2010.
Consolidation deals were a dominant feature of 2009, with two large health-care deals alone contributing more than 8% of total M&A value. The percentage of acquisitions worth less than $125 million continued to grow, as companies sold noncore activities and underperforming assets.
There are growing signs of an improvement in the M&A environment, the report says. The global economy appears to be returning to growthâ€•often a harbinger of M&A activityâ€•while the recovery in the capital markets is making it easier to finance deals. If there is a repeat of the pattern of previous M&A downturns—recovery following two successive years of decline—deal activity should start to increase in 2010.
There remain persistent concerns about the sustainability of the economic recovery that continue to dampen enthusiasm for M&A. Corporate deleveraging, monetary tightening, and stubborn levels of unemployment are among factors that could create a double-dip downturn. Fears of sovereign debt defaults have also spooked the markets.
The M&A Outlook for 2010
Despite such concerns, a recent BCG survey found that a significant proportion of senior executives in the largest publicly listed European companies were preparing for a major deal in 2010. The report says that attractive M&A opportunities for businesses with robust finances will include further consolidation deals and corporate restructuring divestments. Potential acquirers will include buyers from emerging markets and companies seeking to accelerate top-line growth after scaling back investment during the financial crisis.
The new BCG research also shows that there is no perfect time for doing a deal in a downturn. During the last complete downturn cycle of 2001–03, returns from acquisitions were 9% or more on average two years after the announcementâ€•whether the deal was done in the first, second, or third year of the downturn.
“Companies that sit on the sidelines risk being left behind as confidence grows in the outlook for the global economy and the M&A market,” said Jeff Gell, a BCG partner and coauthor of the report. “The winners in this patchy M&A recovery will be the companies that are ready to capitalise on the opportunities.”