M&A: lessons from history

June 16, 2009

Two chunky bits of M&A research landed this week (both, incidentally, drawing on Thomson Reuters data).

Cass Business School’s recently established M&A Research Centre sounded a note of a caution about the merits of buying floundering companies, even if such deals are initially welcomed by the market.

“Companies who bought distressed or insolvent rivals over the past quarter-century suffered lower returns on equity and underperformed buyers of healthy firms, a study released on Monday showed…

‘Even though acquisitions of distressed firms are viewed as value-enhancing by the market — no doubt driven by low valuations — the integration process of a distressed target proves challenging for many acquirers,’ wrote the authors, led by Scott Moeller.” (Read the full Reuters story here.)

And JPMorgan looked at the changing face of M&A since 1990, drawing some intriguing contrasts between the current malaise and the bursting of the tech, media and telecoms (TMT) bubble at the start of the decade. JPM notes the dotcom years actually saw a larger M&A boom, relative to the size of the world economy, than the credit bubble:

“Looking back at the 1999-2000 peak, M&A as a percentage of GDP reached its upper limit after 7 years of continuous growth and stagnated for 2 years at 10% to finally collapse and return within 2 years to 4%. In contrast, between 2006 and 2007, whilst M&A was at an all time high level, the same ratio found a new upper limit at 8% and followed the same 2 year high-plateau pattern before suddenly collapsing with the credit crisis in 2008.” …

“Based on the hypothesis that the M&A/GDP pattern could repeat itself global activity as % of GDP could reach 3.6%, 3.7% & 4.5% in 2009, 2010 and 2011 respectively, mirroring the upturn of 2002, 2003 and 2004. When matched with IMF GDP forecast for the same years this could mean that M&A activity could return to slow growth as early as this year and next and eventually reach US$2,622bn by 2011.”

The millennial deal bonanza was both more focused and less cross-border than the last one. In ’99, TMT dealmaking alone accounted for an astonishing 55 percent of overall M&A deal value, whereas deals involving private equity, the darlings of the latest bubble, peaked at 22 percent in 2006.

Also different this time round: acquirers from emerging markets are driving an ever-bigger share of cross-border deals, with 28 percent of overall volume in the year to date.

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