According to a study by consultancy Towers Perrin and Cass Business School, deals done in the year after the peak of any M&A cycle tend to create the most shareholder value. Since everyone seems to think 2007 was the peak of the current cycle (given the way the market has cooled off in recent months), this means there are great opportunities available in 2008 – as long as you have cash in the bank.
The study looked at nearly 40,000 big acquisitions (i.e. $400m to $1.5bn) by public companies over three economic cycles. In 1990 and 2000, the years immediately following the peak of the last two cycles, the shares of the acquiring company were on average 5.4% above the MSCI World Index (a representative basket of global shares) six months after the deal completed. However, those who did deals just before the peak ended up a full 2% below six months later – suggesting that acquirers were doing better-value deals in the year after the market started to cool.
The authors argue that since this M&A cycle has already yielded better results than the last two – in that deals tend to create rather than destroy value – this trend is even more likely to continue. (Although the counter-argument might be that companies have since got a lot better at doing deals, so there’ll be less of a correction in the post-peak year…)
Of course, making a success of M&A isn’t just about getting the timing right. Towers Perrin also identifies seven key factors that distinguish good deals from bad ones: good leadership, cultural alignment, salary alignment, organisational redesign, staffing, rigorous governance and the ongoing delivery of HR services. Get any of these wrong, and your new acquisition will be a flop whenever you buy it.
And the real problem at the moment (as TP admits) is that not everyone can do deals, even if they want to. As private equity firms will tell you: it’s all very well having cash to burn, but if banks are refusing to provide debt financing, you’re not going to get many deals done.
But for those that can afford it (like Microsoft, for example), now might be the time to grasp the nettle. The learned folk at Towers Perrin even quote the Scottish play to illustrate their point: ‘If it were done when 'tis done, then 'twere well / It were done quickly’. Then again, killing Duncan didn’t exactly do wonders for Macbeth’s leadership career – any CEOs who decide to take this advice on the M&A front will hope to have rather more luck than he did...
For more on seizing opportunities in a downturn, check out Don’t Look Down, a feature from this month’s issue of MT.