Posted on 21 Jul 09
It's no secret that when financial markets tumbled last fall, merger and acquisition (M&A) activity slowed significantly. Billions of dollars in deals that were in the works in markets around the world disappeared or were put on hold as credit dried up and aversion to risk intensified.
Still, some companies continued to pursue deals and close them, lured by lower-priced assets and opportunities for future growth. Now there's evidence that the strategy helped soften the blows from the global recession.
Post-trauma stress-test results for deal makers
According to a study by Towers Perrin and the Cass Business School in London, companies that completed mergers or acquisitions since the beginning of the downturn outperformed their non-acquisitive peers by 6.3% globally. The study examined 204 deals around the world with a value greater than $100 million that were completed between September 15, 2008 (the day Lehman Brothers filed for bankruptcy) and May 31, 2009.
While returns on share prices of all the companies studied tumbled 31.8%, the decline was significantly less for the deal-making group (25.5%).
On a regional basis, deals done in North America provided the strongest results, with companies achieving a 9.1% better return than the market overall, measured by the MSCI World Index. Performance also varied by sector. Health care was the most buoyant, with a 13.8% better return than the overall global market.
Deals for all seasons, despite the risks
The Towers Perrin study was designed to shed light on how merger and acquisition activity was affected by the crisis in the financial markets following the Lehman Brothers collapse. It shows that value can be found even in today's relatively challenging climate and that fears of pursuing deals — whether because of valuation difficulties or market volatility — can be misplaced.
The study also suggests that the more deals done by a company, the better its results relative to the overall market. Repeat acquirers over the period studied — a total of 15 companies completing 32 deals — outperformed the MSCI World Index by 8.1%. Companies in North America that did multiple deals outperformed by 13.3%.
Tips for better performance in a difficult market
To maximize return on M&A investments in what remains a difficult financial environment, Towers Perrin recommends that deal makers should:
* Remain diligent about due diligence. Jumping into a transaction because the price appears low is not only irresponsible, but can be damaging.
* Focus on integration execution. Realize synergies efficiently and effectively, and ensure an immediate focus on areas of critical value — leadership, culture, rewards, communication, workforce deployment and selection, and staffing.
* Be prepared. Work to inform and prepare staff, and improve execution capabilities. Being ready pays off in efficiency and quality of execution.