Given the chaos in the financial economy, it should come as no surprise that M&A activity fell sharply in the fourth quarter of 2008. Since 1980, US recessions have led to steep declines in the value of global M&A activity—typically, of around 50 percent during the first year. That falloff results from factors we see in the current downturn as well, including lower deal values in sinking equity markets; difficulties with financing, particularly for very large transactions; and a general fear about the economic outlook, which forces acquirers to put plans on hold. Moreover, in December 2008 stock markets were down 40 to 50 percent from their January levels. Corporate earnings expectations have been substantially lower too, and access to funds is challenging, to say the least. Show
The current environment is grim, and nobody knows how the M&A market will develop in the short term. The last quarter saw a sharp drop in activity, and there is still considerable uncertainty about the ability of capital markets—particularly the debt markets—to provide enough financing to support deals. We believe that over the longer term, however, the trends that emerged over the past cycle will remain important. As a result, the pattern of M&A activity in the current downturn will be quite different from that of previous cycles. Stock markets peaked in the fourth quarter of 2007, and the world economy has been progressively slowing through 2008. But the 2008 M&A market should be seen in context: the value of announced M&A activity for the whole year reached $3.4 trillion globally, the third-highest level of all time. If 2007’s volumes now look like a departure from the trend, 2008 seems to mark a return to it rather than a complete collapse: volumes fell by 25 percent from 2007, back to levels comparable to those of 2006, the second-highest year of all time. Moreover, volumes went up significantly quarter by quarter until the slowdown in the fourth one—despite a 40 to 50 percent decline on stock markets, the collapse of expectations for corporate earnings, and limited access to funding. In the fourth quarter, a significant number of large deals, such as BHP Billiton’s bid for Rio Tinto, were withdrawn. Yet though the volume of withdrawn deals for that quarter was relatively high, for the whole year it wasn’t so—about 15 percent of deals by value, and 4 percent of deals by number for the year, versus an average 13 percent and 5 percent for deal value and deal numbers respectively since 1995. Indeed, though the cycle peaked in 2006 and 2007, just over 60 percent of the deals announced in those years were completed, versus 87 percent for the previous decade. M&A activity got a boost in 2008 from restructuring transactions that were generated by the crisis: government-sponsored deals represented 25 percent of those in the financial-institutions sector, which accounted for 23 percent of total deal volumes in 2008. The effects of these deals were perhaps more limited than most observers think, however. The top ten transactions for financial institutions repre-sented 4.5 percent of total deal volumes in 2008, in line with the 5 percent of 2007.1 Even excluding these transactions, underlying volumes remained surprisingly healthy in 2008, and M&A proved to be resilient for the year as a whole. The question, of course, is what 2008’s activity portends for 2009. A different kind of cycle?During the previous M&A cycle, volumes peaked in 1999 and then fell almost by half during the following year before they hit bottom, in 2002—the cycle ended suddenly and decisively. It’s impossible to say where the M&A market will go in the short term, and nobody is anticipating a fast recovery. But when you think about the trends in the previous cycle and the market’s performance in 2008, the picture that emerges is quite different from the traditional boom-and-bust pattern of previous cycles. Certain characteristics of deal activity in the previous up cycle suggest that M&A may be more resilient and more relevant to the general economy in this downturn than in previous ones.
Exhibit 1 A global marketEmerging markets play an increasingly important role in the global M&A market.
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Exhibit 2 Trends in deal value addedThe total level of value creation has started to decline, and the majority of it is being captured by the target rather than the acquirer.
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We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: Most of these themes are likely to persist in 2009. The events of the past year undoubtedly dealt a major blow to the confidence of many companies. Nonetheless, M&A volumes remained healthy. Companies went into this downturn with relatively strong balance sheets,5 and valuations have become much more affordable. As the slowdown progresses, good companies in many sectors will certainly come close to financial distress. The megadeals of 2006 and 2007 were ambitious acquisitions of healthy companies facilitated by cheap financing; those of 2008 were resuscitations of failing banks. Although financing conditions are now considerably more challenging, this does not spell the end of megadeals: in 2009 and 2010, there will probably be a number of well-planned takeovers of struggling industrial giants. A few have already appeared on radar screens. The next few years will present considerable opportunities for ambitious and disciplined acquirers—and these are not in short supply, as we have seen over the past few years. Asian acquirers, less affected by the credit crisis than their counterparts in Europe and the United States, will have a stronger incentive to look for overseas acquisitions. What will be different?Although we see little change in the themes driving the M&A market, the way companies think about the execution of deals has already changed visibly. M&A in a rising market with easy access to capital is very different from acquisitions in a downturn, when opportunities arise and decisions must be made very quickly. The key differences fall in three specific areas. SpeedThe interval between the announcement and the closing of deals valued above $1 billion has fallen dramatically, from about 130 days (1995–2007) to about 60 in 2008.6 Companies have already started to realize that if they want to close successfully in turbulent markets, they must undertake fast, targeted due diligence on the main issues and then use reps and warranties more extensively to address minor ones. Managing stakeholdersIn today’s market, a company can’t start to negotiate deals without knowing for sure whether it will have the necessary support at the end: there is no longer much time to build an internal consensus among the board, nor can executives assume that shareholders will extend the benefit of any doubts. In particular, a company must actively establish realistic expectations for growth and profitability. Coming out of the past few years, many board members and shareholders will have unrealistic ones—the downturn is not yet reflected in future earnings estimates, and this problem will have to be managed to frame external growth moves correctly.7 It is likely that we will see a greater proportion of deals financed by equity, due to the economic uncertainties: this will make solid investor and board support even more important. Opportunity scanningThe best opportunities in a downturn are often good pieces of a distressed portfolio forced into a fire sale. Success in this environment will depend on choosing the right targets to stalk: these will be very different from the sorts of deals business-development teams have considered during the past few years. Now is the right time to put aside conventional thinking about M&A and take a fresh look at your industry: do not assume that any company will simply be “not for sale” over the next few years. Which companies will experience difficulty? Which parts of which businesses would tempt you? How can you put together creative deals that will snare them? Is the sense of national consciousness that boosts the culture and interests of one country over those of other countries?1 : loyalty and devotion to a nation especially : a sense of national consciousness (see consciousness sense 1c) exalting one nation above all others and placing primary emphasis on promotion of its culture and interests as opposed to those of other nations or supranational groups Intense nationalism was one of the ...
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