Acquirers generally see higher returns from deals made in a weak economy, said the Boston Consulting Group that recently released its M&A study report titled Downturns are a better time for deal hunting.
The study analyzed a unique data set totaling more than 51,600 deals over the past 40 years, out of BCG’s total M&A database of more than 750,000 deals, according to the company.
Dealmakers perform better in downturns, but experience matters
Dealmakers are bracing for a downturn against the backdrop of softening investor support for M&A, said Jens Kengelbach, a BCG senior partner, the firm’s global head of M&A, and a report coauthor.
Acquirers’ cumulative abnormal returns (CARs) centered on the announcement date fell to an average of –0.4% in 2018, the report says.
Although it is well above the historical average of –1.1%, this negative figure represents a reversal of the recent trend that saw investors placing their bets on dealmakers, the report adds.
“For the first time since 2011, CARs were negative for acquirers of public targets in 2018—an indication that investor sentiment toward M&A is returning to the old normal,” said Kengelbach.
Although occasional buyers can create value through acquisitions in weak economies, experienced buyers outperform by a wide margin, said BCG.
Experienced buyers can create value from M&A in any economic environment (2-year RTSR of 7.3% in a weak economy versus 1.1% in a strong economy), the report says .
Occasional buyers are able to create some value from M&A in a weak economy (2-year RTSR of 1.4%), but they destroy value in good economic times (2-year RTSR of –13.8%), the report adds.
Highlights of the study
- Deals made in a weak economy create more value for buyers than those made in a strong economy in the medium term.
- One year after an acquisition, buyers’ relative total shareholder return (RTSR) is nearly seven percentage points higher for weak-economy deals than for strong-economy deals. After two years, the differential increases to more than 9 percentage points. (RTSR is a company’s total shareholder return compared with its sector index.)
- In a weak economy, noncore deals outside the buyer’s industry create more value than core deals: 1-year RTSR is 3.9 percentage points higher.
- In a strong economy, by contrast, noncore deals destroy value for the buyer (RTSR of –1.0%), while core deals preserve value (RTSR of 0.0%).
- “Although core deals are received more favorably by capital markets around the announcement date, medium-term value creation is higher for companies making bold moves to acquire attractive targets beyond their core industry,” said Georg Keienburg, a BCG partner and a report coauthor.
- “In good economic times, investors apparently prefer that companies focus on their core businesses so that they can realize the synergies required to justify high purchase prices. But in weak economic times, they want companies to diversify and add new businesses that position them for growth in the recovery,” Keienburg added.
How to master M&A in a downturn
To master M&A in a downturn, the authors recommend that buyers do the followings:
Be prepared. Putting in place an ongoing target screening process that covers strategic priority fields is a no-regrets move. If the economy remains strong, the company can act quickly if a buying opportunity (such as a private equity exit) arises. And if the economy weakens, targets may be available at bargain prices.
Boldly pursue downturn M&A opportunities if they materialize. Downturns are, on average, good times to make deals.
Use transformational deals to stay ahead of the curve. Downturn M&A enables companies not only to react to a changing environment but also to accelerate out of the recession when the economy gains traction.