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Mar 31, 2009

M&A focus: deal-making in a downturn

Worst deals during the current financial downturn

Deal-making in a downturn adds more value than bull market acquisitions, according to a recent survey by the Boston Consulting Group (BCG). But try telling that to the bank bosses who mistook a ticking time bomb for a bargain, and have had to reap the consequences.

The prize for worst deal so far during this financial crisis surely goes to Bank of America (BoA) and its chief Ken Lewis, who destroyed value on a massive scale through his $50 bn purchase of Merrill Lynch. Despite assurances that due diligence had been done over 48 frantic hours, Merrill later revealed losses of around $15 bn and Lewis had to go cap-in-hand to the US Treasury for support. 

Investor confidence has been further shaken by the stream of information leaking from BoA and Merrill employees, who don’t see eye to eye with their new colleagues. For example, the Wall Street Journal reports that Merrill staff refer to BoA’s investment banking headquarters in New York as the Death Star. For their part, BoA traders apparently gave a standing ovation when they heard John Thain was stepping down as Merrill CEO. A smooth integration seems unlikely.

But Lewis has competition. Vying for his prize are Eric Daniels and Sir Victor Blank, the CEO and chairman, respectively, of Lloyds Banking Group, formed by the merger of Lloyds TSB and HBOS last year. It was recently revealed that, while Lloyds made a £2.4 mn ($3.4 mn) profit in 2008, HBOS recorded a £10 bn loss. Cue a collapse in the share price of the new group and calls for Daniels and Blank to resign.

Perhaps keen to upstage Lewis, Daniels went on to explain to a committee of UK MPs who were investigating the banking crisis that he would have liked to do more due diligence. If he had had unlimited time, Daniels told MPs, ‘we probably would have put in somewhere around three to five times as much time as we did.’

With boards and shareholders happy to back these deals, there is little the IR professional can do but try to clear up the mess when those same shareholders come back to rant and rave about how it has all turned out.   

IROs could try telling irate shareholders that, statistically, bear market deals do well. The BCG found in its study that downturn acquisitions outperform the market on average over two years, while upturn deals tend to underperform over the same period. Rushed marriages, however, may require IR counseling for years to come.

Details correct at time of going to press.