According to Bain & Company analysis of more than 24,000
transactions between 1996 and 2006, acquisitions completed during
and right after the recession from 2001 to 2002 generated almost
triple the excess returns of acquisitions made during the preceding
boom. ("Excess returns" is defined as shareholder returns from four
weeks before to four weeks after the deal, compared with peers.)
This finding held true regardless of industry or the size of the
deal. Moreover, companies that acquire in bad times as well as in
good outperform boom-time buyers over the long run.
View the larger version of this chart
The most important objective of mergers and acquisitions in any
economic environment is to help execute a company's strategy. In a
downturn, that strategy will almost certainly focus on
strengthening the core business. No company can hope to weather the
downturn without a strong core, and M&A can be a valuable tool
for reinforcing it.
In a recession, M&A can also create strategic options.
Pfizer's agreement to acquire Wyeth, for example, buys some time
for Pfizer as the patents expire on several of its leading
medicines. Other industries are likely to consolidate as market
leaders attempt to increase their options by expanding in scale or
scope-for example, wireless phone companies are adding content and
software capabilities. The equity market isn't necessarily an
obstacle to stock-based deals, since both the acquirer's and the
target's shares are likely to be equally depressed.
M&A's most critical discipline is the investment thesis, a
statement articulating why buying an asset or business will make
your business more valuable. When we surveyed acquirers involved in
both successful and unsuccessful deals, we found that about 80
percent of successful transactions were based on a clear investment
thesis. For failed deals, the proportion was only about 40
Verizon Wireless has kept a clear thesis in mind as it has spent
millions to strengthen its brand. Consumers throughout the US have
seen its ads touting the "power of the network." In wireless, a
brand's strength depends on state-of-the-art technology and
continually expanding geographic coverage.
Those imperatives don't change whether the economy is booming or
slumping. That's why Verizon Wireless has maintained a steady
stream of acquisitions, including 40 deals during the period from
2004 to 2007, and into the downturn. Buying Alltel for $28.1
billion in January 2009, gave it access to additional territories.
Verizon Corp., majority owner of Verizon Wireless, reported a 16.4
percent increase in earnings for 2008 compared with 2007.
Focusing on three practices can help strong companies with
adequate financial resources take advantage of such downturn
First, ratchet up the level of diligence from your M&A team.
Corporate buyers seeking targets in the same industry are
particularly likely to fall into the trap of inadequate diligence
because executives believe they know the industry. An outside-in
view of the target is essential.
Second, update the target list to reflect the changing
environment. The business climate in the future is likely to be
less freewheeling, more tightly regulated, less leveraged, and more
risk averse. That needs to be reflected in the short list of
Finally, don't assume that conventional mergers and acquisitions
are your only options. Partnerships, joint ventures and strategic
alliances give companies the opportunity to compete under a number
of different scenarios without the inflexibility or expense of an
acquisition. The 2008 deal between Morgan Stanley and Smith Barney,
for example, was structured as a joint venture rather than a
merger. Nokia recently established a joint venture with the Indian
company HCL Infosystems to offer services such as navigation and
music for mobile phones.
The key in strategic deals or alliances is the same: to
strengthen the core and stay flexible.
the full article
which describes effective M&A strategy in a
David Harding is co-head of Bain & Company's Global
M&A practice. Darrell Rigby is the head of Bain's Global Retail