M&A: A Smart Strategy in a Down Economy
Not surprisingly, the pace of merger activity in 2008-09 has slowed dramatically as compared with recent years. Excluding a few megadeals, the M&A world has indeed been quiet. With a weak economy and an ongoing liquidity squeeze, most pundits expect that few significant deals will happen this year—and many think that is exactly the way it should be.
The prevailing view is that acquisitions are a luxury, to be pursued in good times and forsaken in the bad. The prevailing view is completely wrong. Deals are always risky, but doing nothing in a downtown may be the riskiest move of all.
Acquisitions and divestitures are key tools in the implementation of corporate strategy. Since corporate strategy needs to be implemented throughout the business cycle, in good economic times and bad, so must M&A. In fact, many of the most value-creating deals are done during economic downturns.
As the most successful buyers recognize, acquisitions made during periods when most firms are shunning deals actually provide the best long-term returns for shareholders.
Successful companies recognize that recessions, or any crises, provide as many opportunities as they do dangers. These firms will also recognize that well-timed downturn deals present opportunities that are unlikely to be found in better economies. Tough times present openings to pick up businesses and assets that may be overleveraged or undermanaged, or that are simply no longer core operations for the seller. It is a chance to change the competitive dynamic in the acquirer's favor.
It is clear to me that the winners and losers for the next decade will be determined over the next six to nine months. In some cases, a firm's fate will be out of its control. But for the most part, companies will make the strategic decisions that will have long-term impact on them and their competitors. Those that choose to hunker down and hoard their cash may very well survive the current downturn. But the companies that aren't afraid to seize the M&A moment are likely to be the real winners in the years ahead.