In the first quarter of 2008 there has been a reduced appetite in boardrooms for mergers and acquisitions. Not least, because the banks have been less willing to lend money for corporate takeovers due to the credit crunch.

However, businesses and funds with large cash reserves, such as the sovereign wealth funds and cash rich corporates, would do well to increase their M&A focus.

Recent research by the Boston Consulting Group (BCG) has shown that merger and acquisition activity, during economic downturns, delivers better shareholder value for both buyer and sellers in the long term. Based on an analysis of 408,076 deals from 1981 through 2008, with a special focus on more than 5,100 divestments, the BCG report gives a compelling reason for pursuing M&A when the economy is weak: "downturn deals have a higher chance of creating shareholder value and delivering greater returns."

Key findings are as follows.

Downturn deals - those executed during recessions or periods of slow (less than 3 percent annual) growth -- are "twice as likely to produce long-term returns in excess of 50 percent and, on average, create 14.5 percent more value for shareholders of the acquirer."

Divestitures have a higher probability of success for buyers than the purchase of entire companies and can "create substantial value" for sellers as well. Sellers' overall returns from divestitures are 1.5 percent, on average, rising to 1.7 percent (a 13 percent increase) during downturns, "suggesting that it is a good idea to clean up portfolios during downturns."

On average, 57.5 percent of buyers of divested assets generate

positive returns, compared with 41.7 percent of buyers of entire companies.

The report found that the long-term advantage of downturn deals cannot be explained by companies simply buying up businesses on the cheap and selling for much higher prices later on. It is more likely to do with the fact that during difficult times businesses look at potential targets with a more objective eye and can more readily identify businesses with unrealised potential. Having the cash to do deals obviously helps. Currently corporate buyers are sitting on cash reserves of about £1300bn - 56 percent more than they had at the peak of the last M&A boom in 2000.

While the total value of M&A transactions decreased 17.8 percent between the first and second halves of 2007, largely due to private-equity firms' retreat in the wake of the credit crunch, the total number of transactions has remained relatively stable and is comparable to the 2000 peak during the last wave of M&A activity. The principal differences: deals are now smaller, on average, and corporations are taking the lead, the corporate share rising from 73 percent to 85 percent of dollar value and private equity's share falling from 27 percent to 13 percent. Also since the 2000 peak the average P/E ratio for the S&P 500 has declined 61 percent from 46.5 to close to the long term average of 15.7.

The key to success for potential buyers, the report says, is focusing on the right types of companies: typically those "with strong finances and relatively weak profitability."

On average, 57.5 percent of buyers of divested assets generate positive returns, compared with 41.7 percent of buyers of entire companies.

The report found that the long-term advantage of downturn deals cannot be explained by companies simply buying up businesses on the cheap and selling for much higher prices later on. It is more likely to do with the fact that during difficult times businesses look at potential targets with a more objective eye and can more readily identify businesses with unrealised potential. Having the cash to do deals obviously helps. Currently corporate buyers are sitting on cash reserves of about 1300bn - 56 percent more than they had at the peak of the last M&A boom in 2000.

While the total value of M&A transactions decreased 17.8 percent between the first and second halves of 2007, largely due to private-equity firms' retreat in the wake of the credit crunch, the total number of transactions has remained relatively stable and is comparable to the 2000 peak during the last wave of M&A activity. The principal differences: deals are now smaller, on average, and corporations are taking the lead, the corporate share rising from 73 percent to 85 percent of dollar value and private equity's share falling from 27 percent to 13 percent. Also since the 2000 peak the average P/E ratio for the S&P 500 has declined 61 percent from 46.5 to close to the long term average of 15.7.

The key to success for potential buyers, the report says, is focusing on the right types of companies: typically those "with strong finances and relatively weak profitability

For many working in the M&A sector the findings are not really any great surprise.

Lance Blackstone, Head of M&A at City firm, Blackstone Franks LLP (020 7250 3300) certainly sums it up quite well.

"The cheap credit terms available in the last decade have encouraged the emergence of relatively unsophisticated investors who will buy almost anything in the expectation of rising asset values".

"It has long been understood that by far the most successful M&A deals are those where the investor is able to bring new expertise and insight to the project. Serious investors such as these continue to be active throughout all economic cycles. Indeed their activity may increase as the less serious competition retires hurt from the marketplace and price expectations of sellers adjust to reflect fundamental value".

"So, the froth may go but serious buyers continue to be active. In our sector (small to medium sized transactions) we have seen no let up in activity and deals that make economic sense are being done very quickly. The credit crunch has affected some banks more than others but we have still been able to find banks to support deals at any size, albeit on somewhat tighter terms."

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