Investing in mergers and acquisitions (M&A) during an economic downturn or crisis may appear strange. The tendency is to suspend transaction activity or acquisitions, reduce spending, and conserve cash.
However, doing the opposite during difficult times in pursuit of profitable long-term growth can assist CFOs and corporate treasury in locating good-value acquisitions and allowing firms to pull ahead when the economic recovery begins.
According to Bain & Company’s 5th annual Global M&A Report 2023, which was published on January 31, 2023, savvy corporate leaders planning M&A this year are confidence in deal making’s capacity to create value. While the M&A deal market in 2022 fell 32% from a record high in 2021, Bain’s analysis confirms that dealmaker sentiment is positive and remains vital to corporate growth and profitability.
Bain surveyed approximately 300 M&A practitioners to better understand the nature of the activity and the decision-making process. The study was conducted in October 2022 in the United States, Canada, Brazil, the United Kingdom, Germany, France, Greece, Italy, Switzerland, Japan, India, and Australia. The paper shows why clever business leaders will convert the crisis into an opportunity by boosting M&A activity in 2023, as well as why companies that remain on the sidelines will pay a high price.
To back up its claim, Bain examined the global financial crisis of 2007-2009 and beyond, analyzing the M&A activity of hundreds of firms at that time to emphasize the lessons that may be “learned from different M&A behavior during times of turbulence.”
Stay in the M&A game and learn how to play it successfully even during challenging times.
Bain examined the returns to shareholders for over 2,900 publicly listed firms’ M&A activity from 2007 to 2017. “In 2007, global agreements crossed 40,000 for the first time; their total value reached $4.6 trillion, 40% more than the dotcom peak in 2000. The M&A celebration looked to go on indefinitely. However, when the global financial crisis abruptly ended the boom and most nations entered a recession between 2008 and 2009, the hangover set in. According to the research, many company executives became wary of any form of deal making, with deal volume dropping by 14% between 2007 and 2009.
According to the report’s statistics, companies who engaged in dealmaking or acquisitions during the previous economic downturn “consistently outperformed those that stayed away from deals.” Reality is that “Companies that acquired during the last economic downturn achieved an average annual total shareholder return (TSR) of 5.9% compared with 4.7% for those that did not” , the publication said.
According to the research, the most essential goal of M&A is not only to be an active acquirer, but to help with effective strategy execution – “Be it strengthening the core business and increasing scale or creating strategic options via a scope deal.”
“Several industry-defining deals happened throughout the last economic recession”, even as select firms, regardless of the downturn, utilized their resources to broaden their strategic alternatives through the M&A path.
Examples include: “Pfizer’s agreement to acquire Wyeth for $68.4 billion in early 2009 bought some time for Pfizer as patents were about to expire on several of its leading medicines, and it gave Pfizer an opportunity to diversify its pharmaceuticals portfolio and expand its pipeline (with a particular focus on biopharmaceuticals and vaccines)” , the summary stated.
Aside from creating strategic options, allocating resources for acquisitions during a recession is a sound strategy because it provides corporations with a tremendous opportunity to make bold moves to outperform their competitors while also acquiring assets that are “cheaper” than they have been in years.
Frequency and materiality distinguish M&A performance.
The paper goes on to say that, “Like most things in life, you get better at what you do when you do it repeatedly.” Companies that buy regularly, known as’serial bolt-ons’ (see picture below), beat the typical firm in terms of TSR (6.7% each year).”
Companies that do M&A frequently and at scale outperform
The core study that underlies Bain’s belief in “The concept of repeatable M&A (replicated multiple times over the past 20 years) shows that frequency (how many deals you do) and materiality (how much of it you do) define a lot of what differentiates M&A performance.”
About one acquisition per year is sufficient to qualify as a frequent purchaser. According to Bain’s study, “To be a material acquirer does require heft: 75% or more of your market cap from acquired companies over a decade”.
Bain refers to organizations that make frequent and significant acquisitions over a decade as mountain climbers (see image above – in red, top right) and build the “Greatest TSR.”
The opposite is true: “Companies that are infrequent acquirers but that undertake large deals relative to their market capitalization—we refer to such companies as selective large bets.”
“Among all companies studied, selective large bets are the worst performers over time as their limited acquisition experience, combined with investment in a large deal, usually lead to poor deal outcomes” , cautions the report. Additionally, selective large bets “Generated only 3.7% in annual TSR from 2007 to 2017.”
Organizations who engaged in persistent M&A activity across economic cycles correlated to better TSR than competitors that remained on the sidelines. According to the Bain research, “this finding holds up year after year, across industries”.
According to Bain, “Deal success and deal failure is more a matter of cumulative experience and capability in making a deal and less a function of standalone deal circumstances”.
While researching M&A behavior during economic downturns, the Bain study also examines the returns of active and passive acquirers in comparison to their pre- and post-recession M&A activities.
“Those companies that were active acquirers before the recession performed best by staying active—their average annual TSR was 6.1% compared with 3.8% for those that decided to move to the sidelines (see figure below – in red, left).”
Active acquirers outperformed bystanders during the last economic downturn
Organizations who were inactive in deal making before to the crisis but modified their M&A behavior to become active acquirers during the last recession had an “Annual TSR of 5.5% compared with 5.0%” for those that remained spectators (see figure above – in red, right).
Conclusion
Given the drop in deal making in 2022 and the volatility of the global economy, firms may be inclined to take a wait-and-see strategy before undertaking large-scale acquisitions. However, for firms that want to prosper and place more bets on successful long-term growth rather than short-term outcomes, now may be an excellent time to acquire companies instead of sitting on the sidelines in order to outperform the competition.
Experience and history show that economic downturns provide opportunities for corporate acquirers to make daring decisions and engage in acquisitions that will pay off when economic activity recovers. Bain’s research supports this claim: “Our long-term research proves that proactive dealmakers are more likely to emerge from downturns as winners.”
