M&A is a dominant force in industries consolidation. It has become increasing global rather than dominated by a few countries with little linkage among them. In 2000 and 2001, the United States, Europe, and Asia accounted for approximately 60, 30, and 10 percent of deal volumes by target, respectively. From 2005 to 2008, the distribution was much more balanced, at approximately 40, 40, and 20 percent. Cross-border M&A activity grew from 23 percent of the total in 2000 to 29 percent in 2006 and 41 percent 2007, falling back to 35 percent in 2008. Emerging markets, particularly in Asia, played an important role in this transformation; China and India together represented some 12 percent of all cross-border deals in 2008.
How M & A is different in downturn as compare to in rising market?
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.
The 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. 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 representative and warranties more extensively to address minor ones.
In a downturn 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 rising market, 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. 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.
The 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 rising market in a last few years. In the downturn it is necessary to put aside conventional thinking about M&A and take a fresh look at the 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?