The prevailing wisdom is that the recession will inevitably throw up some bargains: companies with pots of cash in the bank will be able to pick up strugglers on the cheap, and then cash in when the cycle picks up. That’s the only reason we can think of why two groups are apparently now pondering an investment in Setanta, the struggling Irish pay-TV broadcaster that’s about to default on its most important contract. But according to a new report from Cass Business School, these distressed deals may boost the share price in the short-term, but they’ll lose money eventually – because it’s so hard to incorporate the new business into your existing one.
Setanta’s woes increased today when the English Premier League said that unless the broadcaster stumps up £30m by the end of this week, it will lose its quota of 46 live games next season. So it urgently needs a cash injection – and according to reports today, both Dutch media firm Endemol and US-owned Access Industries are both considering a bid for about half of its shares. Since Setanta only has about 60% of the subscribers it needs to break even, and it’s about to lose half of the measly slice of EPL action that it’s currently got, we couldn’t quite see why anyone would be interested – unless its price had fallen so far that its two suitors felt it was worth a punt (appropriately, given its Irish heritage).
However, this report from Cass M&A Research Centre (‘The Good, the Bad and the Ugly’) suggests that buying cheap is no guarantee that you’re getting a good deal. Its study, of over 12,000 distressed deals in the last 25 years, found that these deals do tend to create positive shareholder returns at the time of the transaction, largely because the deal is cheap and can be pushed through quickly (so investors think they’re onto a winner). But over the next three years, the return on shareholder equity actually deteriorates – which suggests that the buyer usually finds the integration process very difficult. And there’s a certain logic to this, since it’s quite likely that standards have been allowed to slip in a failing company.
Of course, some companies will undoubtedly bag themselves a bargain in a recessionary fire-sale. For instance, Barclays’ bold acquisition of Lehman’s US operation looks set to be a massive money-spinner. And it depends to some extent what kind of asset you're buying (people are usually more complicated than, say, buildings). But equally, we can well imagine that some CEOs opportunistically rush into cheap deals that make strategic sense, without giving too much thought to the integration process. Lloyds shareholders would suggest that its acquisition of HBOS falls into the category, at least on current evidence.
In today's bulletin:
Poor old Tesco makes do with 10% jump in sales
350,000 jobs to go in public sector recession?
Long wait for superfast internet
Beware the bargain-basement takeover
No sign of green shoots for owner-managers