The value of mergers and acquisitions is slated to plunge to levels not seen since the mid 1990s, according to a report by the Boston Consulting Group.
The total value of the 12,700 M&A deals logged during the first half of 2009 was $681 billion; if that pace holds during the second half, the sector is on track to be 46 percent down compared with all of 2008.
And the number of deals made during the first half represents a 17 percent decline from last year’s levels. If that number manages to double during the second half of this year, the number of deals would be at its lowest level since 2004.
The report’s authors, BCG partners Alexander Roos and Jeff Gell, advise that the climate favors companies prepared to make strategic moves as the market returns to growth.
That means distressed businesses in need of cash will be prime targets, they write, whether they’re divisions of distressed corporations or private-equity-owned standalones that can’t refinance their debt.
And according to their analysis of a sampling of S&P 500 firms, the top 20 percent are “predators” and the bottom 20 percent are “prey,” with the middle group on the cusp. About a quarter of that group could become predators if they make the right moves.
Deals will need to meet a few criteria to be successful, they write:
- Buyers will need to show above-average profitability (and higher profits than their targets);
- Sellers’ financial woes must not have bled into operational problems:
- Buyers should be larger than sellers and in different sectors than their targets
And, as always, due diligence is paramount, not just in examining a potential buy but in assessing and “stress testing” buyers’ own financial health.