Now is the time to buy a business

Now is the time to buy a business.

(This is an abridged version of the one available on the subscribers site.)

There has been a reduced appetite in boardrooms for mergers and acquisitions but recent research by the Boston Consulting Group (BCG) has shown that merger and acquisition activity, during economic downturns, delivers better 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.  So downturn deals have a higher chance of delivering greater returns.

Therefore it seems that businesses and entrepreneurs with cash would do well to increase their M&A activity rather than reduce it..

Key findings are as follows.

Downturn deals i.e. those executed during recessions or periods of slow growth  are twice as likely to produce long-term returns in excess of 50 percent compared with deals done at other times.

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 13 percent higher during downturns, suggesting that it is a good idea to clean up portfolios during downturns.

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. Some call it "downturn discipline".  Having the cash to do deals obviously helps.

While the total value of M&A transactions has decreased deals are now smaller, on average, and corporations are taking the lead.  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