Exit and Growth Strategies for Middle Market Businesses

2009 Ripe for Corporate Buyers

By Brian Ballo | Nov 24, 2008

For Corporate Buyers that Pursue a Disciplined Approach: 2009 is the Time to Buy a Company

Corporate executives at middle market companies understand that meeting investor demands for growth is difficult to achieve organically. Therefore, making strategic acquisitions are critical to building scale and growing revenues.

The impetus for pursing an acquisition have become even more compelling in light of the current challenging economic times, which has put downward pressure on valuation multiples. Indeed, a recent Boston Consulting Group report entitled “The Return of the Strategist: Creating Value with M&A in Downturns” underscores why a weak economy is often an ideal time to acquire a company.  Key findings of this report include:

  • Corporate buyers are uniquely positioned to take advantage of the tough economic times, since they possess the cash to complete transactions, whereas the financial private equity buyers have been restrained from borrowing in the wake of the credit crisis.
  • Acquisitions completed during recessions are twice as likely as upturn deals to produce long-term returns in excess of 50%, and, on average, create 14.5% more value for acquirer shareholders.
  • The best type of company to buy during a recession is one with strong finances and relatively weak profitability.
  • Corporate buyers can also increase their returns and likelihood for success by acquiring relatively small targets.
  • Surprisingly, acquirers can also create value by paying above-average premiums, provided the underlying rationale for the deal makes sense.
  • Acquirers in difficult economic conditions are better at identifying targets with unrealized potential, probably because of the disciplining power of downturns, when every dollar counts.

Yet, despite the promise of adding value from a discounted acquisition, the reality is still that the majority of acquisitions will fail to result in any cost savings or merger synergies. So, how do the top value creators in downturns pick the best targets? To summarize research in this area, the world of corporate acquirers is divided into those that discipline their acquisition process and, thereby, improve the odds that an acquisition will prove successful, versus those who essentially roll the dice each time they acquire.

Disciplining the acquisition process means employing best practices, implemented at each step of the acquisition process.  These steps proceed methodically from clarifying the acquisition strategy, to analyzing financing options, to systematically researching all potential target acquisitions, to evaluating strategic value, to formally valuing targets (using discounted cash-flow analysis, accretion-dilution analysis, and EBITDA market comparables), to negotiating Letter of Intent terms, to conducting both strategic and risk-oriented due diligence, and finally, to negotiating a set of definitive Purchase and Sale Agreement documents.

In short, if you want your corporation to take advantage of quality market opportunities to make an acquisition, you need to honestly assess whether your company already has, or realistically can develop internally, a disciplined acquisition process. Corporate executives who believe that their skills in other financial and operation areas can be quickly applied to acquisitions are often only rolling the dice.  They would be better served by engaging a M&A investment banking firm that does such acquisition work for a living.  Experienced M&A Professionals know how to implement buy-side “best practices,” and their services can be obtained either on a fully outsourced basis, or more commonly, to complement your in-house Corporate Development team’s efforts.

Yes, the market in the first half of 2009 will be ripe for corporate buyers.  However, only those corporate buyers that pursue a disciplined acquisition process will improve the probability that a strategic acquisition will actually result in anticipated value synergies.

2 Responses to “2009 Ripe for Corporate Buyers”

  1. jeff pierce says:

    The currency converter market is doing strong and people should invest in that before the stock market gets worse

  2. Ken Kaufman says:

    I was not aware of the statistic that acquistions made during a recession were twice as likely to produce positive results. It makes sense, I just had never seen the stat on it.

    This is a great blog. Thanks!

    Ken K

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