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The Value of M&A Deals Is on Track to Plunge Nearly 50 Percent This Year to Levels Not Seen Since the Mid-1990s, Says Report by The Boston Consulting Group

The value of M&A deals is on track to plummet almost 46 percent this year, taking them down to levels not seen since the mid-1990s, according to a report published today by The Boston Consulting Group (BCG).

Only 12,700 transactions were conducted in the first six months of the year—a drop of 17 percent compared with the same period in 2008. The cumulative value of these deals amounted to a mere $681 billion. If the number of transactions for all of 2009 turns out to be double the figure for the first six months, the drop would take the number of deals down to a level last witnessed in 2004.

But in Be Daring When Others Are Fearful: Seizing M&A Opportunities While They Last, BCG contends that the financial crisis will provide opportunities for game-changing acquisitions by companies that are ready to make the right strategic moves when the M&A market returns to growth.

“We expect a window of opportunity offering attractive takeover prospects to open soon,” says Alexander Roos, a BCG partner and coauthor of the report. “But only those companies that have prepared themselves for action will be able to benefit from these favorable opportunities. We have already seen some of our smarter clients making preparations in recent months.”

The report, part of BCG’s annual series on the M&A business, analyzes more than 5,200 transactions to identify the factors behind successful deals, with a special focus on the period since the start of the subprime crisis. BCG’s extensive research shows that the most promising opportunities as the M&A market returns to growth will be the acquisition of distressed businesses with further financing needs. In addition to businesses divested by larger distressed groups, targets in the coming period are likely to include a significant number of private-equity portfolio companies unable to refinance their debt.

But not every company is in a position to make acquisitions. BCG’s analysis of a sample of companies in the S&P 500 shows that about 20 percent are “predators,” ready to take on the risks of a deal, while another 20 percent are “prey”—so weak and vulnerable that they must focus on survival or be swallowed. The remaining 60 percent have the potential to be either predator or prey—and BCG estimates that up to one-quarter of these companies could become predators by rigorously strengthening their finances and reshaping their businesses.

The M&A Market

Although the value of M&A transactions fell steeply in 2008, the number of deals was still higher than in much of the past decade. However, the bankruptcy of Lehman Brothers in September 2008 prompted a significant further decline in activity that continued into the first half of 2009.

The return to life of the global capital markets in the second quarter of 2009 increased the availability of financing and reduced its cost. Debt issuance rose, especially in investment-grade debt, and the number of secondary- equity issues increased sharply.

A BCG survey of the world’s largest and most active investors found that they want companies to be ready to capitalize on M&A opportunities when they arise. “Investors want management teams to take advantage of these adverse conditions in order to improve their position in the competitive landscape whenever possible,” says Roos.

Strategies for Smart Predators

The report says that the following factors significantly increase the chances that the acquisition of a distressed target will succeed:

The predator is above average in profitability and more profitable than the target
The target has financial problems but has not yet run into operating difficulties
The predator is bigger than the target
The target is in a different sector from the predator

Conventional M&A strategies must be updated to deal with much more uncertainty during the current financial crisis, the report says.

“This time more than ever, it will be important for predators to actively stress- test their own businesses and those of potential targets throughout deal preparation, execution, and integration,” says Jeff Gell, a BCG partner and coauthor of the report.