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Feb 19, 2009

M&A focus: Hopeful forecast for 2009

Deals 'down but not out', as BCG-UBS report predicts bullish activity.


Deal making has dropped considerably since the beginning of the global financial crisis. Signs point to a pickup in M&A activity in 2009, however. What’s more, there may well be no better time to sell a company’s acquisition strategy to shareholders.

For one example take a look at Resolution Limited – a new company established to acquire European insurance firms and asset managers – that began trading on the London Stock Exchange in December after it had raised £600 mn ($913 mn) in the UK’s second-largest IPO of 2008.

The venture is headed up by Clive Cowdery, the insurance entrepreneur, who secured backing from major institutional investors for his new project, highlighting the continuing readiness of money managers to back good acquisition strategies.

Around the same time that Resolution began trading, a report appeared predicting a wave of M&A activity across Europe during 2009. Conducted by the Boston Consulting Group (BCG) and UBS Investment Bank, the report underlines the bullish attitude companies have toward acquisitions for the year ahead.

The paper – entitled ‘M&A: down but not out’ – found most of the companies questioned have not changed their M&A plans despite the economic downturn, with almost a third expecting to make a transaction in the coming year. It based its findings on interviews with chief executives and senior managers of 164 publicly listed companies.

The paper points out that deal making continues even during the worst economic crises, such as in the 1930s, the 1970s and after the 1987 stock market crash. In addition, companies today have plenty of cash to play with and remain relatively profitable. It further notes that the cash surplus of S&P 500 companies is around 70 percent higher than it was in 2000.

Downturn deals should also be easier to sell to shareholders. The study makes reference to a previous paper – ‘Winning through mergers in lean times’, also produced by BCG – that found the average downturn merger beat the market by 8.3 percent two years after its close. By contrast, the average upturn deal underperformed by 6.2 percent over the same time span.

Of course, for every predator there must be prey, and the report details how IROs can judge on which side of the battle they might find themselves. ‘All companies should evaluate where they stand on the predator-prey battleground and develop appropriate strategies,’ it advises.

Details correct at time of going to press.