subject: Why Lean Times May Be the Best Time to Buy A Business by:Richard Jackim [print this page] According to a study by The Boston Consulting Group done during the last economic slowdown in 2002, companies avoiding mergers and acquisitions in the current economic environment may be missing a strategic opportunity. The study analyzed 277 M&A public transactions occurring in the United States between 1985 and 2000 and concluded that mergers taking place during periods of slow economic growth have a higher likelihood of success. Even more important, these weak-economy mergers or acquisitions generate considerably more shareholder value, on average, than deals taking place during periods of above-average growth.
The Boston Consulting Group study looked at deals that took place in years in which real GDP growth was below the long-term average of 3.1% for the period (so-called "weak-economy" mergers) and those that took place in years when growth was above the long-term average ("strong-economy" mergers). While the study involved publicly traded companies, the conclusions reached are equally applicable to privately-held companies as well.
The Strength Of Weak-Economy Mergers
The study showed that while only 42% of the strong-economy deals created shareholder value over a two-year period, more than 47% of the weak-economy deals created value.
Even more significant, the average performance of the weak-economy mergers was markedly better than that of the strong-economy deals. After two years, the total shareholder return (TSR) of the weak-economy deals was 14.5% greater than that of the strong-economy mergers and 8.3% greater than the returns of the market as a whole.
The Weakness Of Strong-Economy Deals
A further sign of the superior performance of weak-economy mergers is that they had nearly twice the likelihood of producing larger returns. The Boston Consulting Group study showed that 13.5% of weak-economy mergers produced two-year returns in excess of 50%, while only 7.4% of strong-economy mergers did so. In contrast, 14.9% of the strong-economy deals produced losses in excess of 50%, compared to only 6.7% of the weak-economy deals.
These findings suggest that executives who avoid mergers or acquisitions in today's economy may be missing an important strategic opportunity. Periods of weak economic growth can be an ideal time for companies to use mergers and acquisitions strategically to buy weaker competitors, consolidate markets, gain market share, strengthen competitive advantage, and position themselves to take advantage of an improving economy.
About the author
MidCap Advisors, LLC is a boutique investment banking firm that specializes in working with privately owned companies. MidCap Advisors provides mergers, acquisitions, capital raising, business valuation and strategic planning services to small and mid-sized companies nationwide. Visit us at http://www.midcapadvisors.com to learn more.
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