SOURCE: The Boston Consulting Group

May 21, 2008 00:01 ET

Economic Slowdowns Are Ideal Times for Mergers and Acquisitions, BCG Finds

Analysis of 408,076 Transactions Shows That Buyers Do Best With Downturn Deals; Downturn Divestitures Improve Results for Sellers as Well, With Returns Increasing 13 Percent, on Average

BERLIN, GERMANY and CHICAGO, IL--(Marketwire - May 21, 2008) - These may not be the best economic times, but they might be the best times for corporate mergers and acquisitions (M&A), says a new report from The Boston Consulting Group (BCG).

"Most companies pull away from the M&A deal table during downturns, but BCG research has found that it is often ideal to acquire a company during a weak economy," the report says.

Based on an analysis of 408,076 deals from 1981 through 2008, with a special focus on more than 5,100 divestitures, the BCG report gives a compelling reason for pursuing M&A when the economy is weak: "downturn deals have a higher chance of creating shareholder value and delivering greater returns."

The key to success for potential buyers, the report says, is focusing on the right types of companies: typically those "with strong finances and relatively weak profitability."

The report, "The Return of the Strategist: Creating Value with M&A in Downturns," includes the following key findings:

--  "Downturn deals have a higher chance of creating value for buyers than
    upturn deals." The BCG study team found that downturn deals -- those
    executed during recessions or periods of slow (less than 3 percent annual)
    growth -- are "twice as likely to produce long-term returns in excess of 50
    percent and, on average, create 14.5 percent more value for shareholders of
    the acquirer."
    
--  Divestitures have a higher probability of success for buyers than the
    purchase of entire companies and can "create substantial value" for sellers
    as well. Sellers' overall returns from divestitures are 1.5 percent, on
    average, rising to 1.7 percent (a 13 percent increase) during downturns,
    "suggesting that it is a good idea to clean up portfolios during
    downturns."
    
--  On average, 57.5 percent of buyers of divested assets generate
    positive returns, compared with 41.7 percent of buyers of entire companies.
    

The study team was led by BCG's global sector coleaders of M&A Jeff Gell, a partner in the firm's Chicago office, and Alexander Roos, a partner in BCG's Berlin office, and Jens Kengelbach, a principal in the firm's Munich office.

The report not only focuses on the financial results of past M&A deals and the conditions that may have contributed to those results -- along with comparisons to current conditions -- but also offers advice to prospective buyers and sellers on what to look for in a deal and how best to pay for it.

The BCG experts found that corporate buyers today are uniquely positioned to take advantage of the tough economic times, with both "the cash and profitability" to make deals. "The average cash surplus of the S&P 500, for example, is 56 percent higher than it was in 2000, when M&A values and volumes reached record heights."

Other findings:

M&A Activity Defies Economic Woes: While the total value of M&A transactions decreased 17.8 percent between the first and second halves of 2007, largely due to private-equity firms' retreat in the wake of the credit crunch, the total number of transactions has remained relatively stable and is comparable to the 2000 peak during the last wave of M&A activity. The principal differences: deals are now smaller, on average, and corporations are taking the lead, the corporate share rising from 73 percent to 85 percent of dollar value and private equity's share falling from 27 percent to 13 percent.

Private-Equity Firms Are Not out of the Game: With some $300 billion of unallocated funds, private-equity firms could return in force to the M&A market.

Downturns Create Opportunity: A recession would inevitably depress M&A activity because deal values and volumes are closely correlated with GDP. The report indicates, however, that a downturn offers huge opportunities for both buyers and sellers to create superior shareholder returns from M&A.

Focus on the Core Business: The key to a successful divestiture acquisition is the purchase of assets that strengthen the core business. Such purchases earn nearly 24 percent higher returns than divestiture purchases in noncore areas.

Divest in Distress: "Companies that divest when they are in financial difficulties send a powerful message to the capital markets that they are committed to restructuring their portfolios, often triggering a sharp rise in shareholder returns."

Size Matters: "Acquirers' returns from divestitures are systematically higher when the relative size of the asset is substantially higher for the buyer than for the seller. In deals where the divested unit represents more than 50 percent of the value of the buyer and less than 10 percent of the value of the seller, acquirer returns (6.5 percent) are almost three times higher than in deals where the relative sizes of acquirer and seller are similar (2.2 percent)."

To receive a copy of the report or to schedule an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients in all sectors and regions to identify their highest-value opportunities, address their most critical challenges, and transform their businesses. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 66 offices in 38 countries. For more information, please visit www.bcg.com.