Economic Turmoil and the Merger & Acquisition Market – From Cruise Control to Off-Road
19 September, 2011
Practitioners of the gentle art of M&A are having to plot some bumpy off-road routes to get deals done, leaving behind the smooth surfaces of the good years.
Over time M&A has been viewed as strategic or discretionary. Cash piles must be invested or returned. Strategic M&A should arguable never be suspended. But there is a politically correct element to the debate. In really tough times corporates repair balance sheets and hoard cash. They continue with CAPEX programmes which include organic growth models. M&A is seen as a distraction when the company is threatened by external events. “Do nothing” seems the safer course and less likely to be criticised if it turns bad.
What are we to believe? That in hard times the normal rules of economic theory are suspended? Owners do not choose to sell assets in difficult markets if they believe better ones lie round the corner. So we have to develop a view of what lies ahead. In most cases since the war, the markets have operated to a 10 year cycle with 2 bad years followed by 8 good years, mimicking the biblical feast and famine. The logical position is to wait out the bad years and the good ones will surely follow. Not necessarily so in today’s world. The (apologies for using the word) paradigm has shifted. The pattern of relentless growth followed by occasional crashes may no longer apply.
A pound for every time I have heard from owners defending the retention of a non-core asset, that it has good management, produces cash and is no distraction. My simple question to them is “which one of those will go wrong before you are forced to sell”. Over and over again, owners hang on to non-core assets, and the low attention they give eventually mean that strategically it become stymied and value is destroyed, only to be sold for a knock down price in distressed circumstances. A triumph of hope over experience.
My contention is that M&A must continue in all circumstances. The idea that waiting is a good idea is an article of faith, not reason. Waiting is a two way risk with great downside as well.
The other factor which is often overlooked is that at any moment in time, the attitude to global events and market conditions varies widely around the world. In a shrunk world view, most parties might share the same view at a purely domestic level. In other words there is no M&A arbitrage. In certain parts of the world, buyers may be in an expansive mood. Japan springs to mind. After years of only modest involvement, there has been a sea change in the attitude of Japanese buyers. The immediate environment may appear unfavourable but the seasoned M&A advisor will see pockets of opportunity created by those same conditions. I term this off-road.
Japanese buyers swept into Switzerland in May spending over CHF10bn on pharma and smart meter deals. The Yen is riding high. The Japanese economy is flat but exporting is prohibitive at current rates. The fragility of the Japanese economy was highlighted by recent natural disasters. Japanese buyers have responded and are working with top advisors to achieve their strategy. But for many, Japan does not feature in their thinking. They are still on cruise control on the blacktop. The smart money is off-road looking in new places.
Same for India or Brazil or China. There are people in these markets who see the malaise as a buying opportunity. The pay back model for these buyers is not 3-5 years. These are very long term decisions and the ability to pay “see-through” values reminiscent of earlier times is a powerful attraction. It is like turning the clock back. I am often asked “when is a good time to sell my company”. My answer is 4 years ago. But good M&A advisors, like Superman, can turn the clock back by identifying buyers with a very different agenda and world view.
We are in a market right now where there are unprecedented numbers of stuck transactions. Sellers are in receive mode. They are anxious about going to market or starting a process. But they would love to receive an approach. There is no way for that to happen without compromising confidentiality. A conversation here and there by advisors, trying to be helpful and identify the still active buyers, quickly leads to the danger of a leak or story.
Well that was the case until recently. MergerID allows a full scale completely secret marketing with no disclosure, even of the name of the advisor, against matching to a global audience of buyers ready, willing and able to consummate a deal. It is a game changer and just in time to allow M&A markets which must remain open to offer clients a process to identify buyers even in today’s market conditions.
The issue is that identification. Many advisors have grown comfortable with a local approach and do not have the connections which are now needed. They cannot suddenly create the infrastructure. That may feed back on their advice, which is more likely to be ‘do nothing’, because they are not equipped to help. The advisors with global reach in the mid market can take a different approach and go off-road to explore these new opportunities. They get deals done in all conditions and rise to the challenge.
Everyone can benefit from the new tools which are available to support advisors with a true global perspective. The complexity of identifying the active buyers and in reaching the true decision makers is always an issue. Technology and matching engines can be a huge advantage in establishing the correct audience on the sell side. For buyers who can see beyond current conditions, the issue is to promote themselves and be noticed. The same technology can come to their aid bringing the two sides together. MergerID was designed for this specific purpose.
In summary, my view is that M&A should remain open. Waiting for better times is not a plan. A much better plan is exploring pockets of buyer interest that turn back the clock from the less travelled parts of the buyer market, without necessarily unleashing a full scale process. Advisors need to adapt. They must learn to use everything around them to rise to the challenge presented by current market conditions and the continued uncertainty over future prospects.
