During a recession or economic downturn, M&A activity will typically decline as sentiment dampens among dealmakers and causes companies to pause ambitious growth plans in order to focus on safeguarding their operations.
As a result, M&A activity carried out during recessions and downturns is often driven by financial distress, with the economic shock causing companies to struggle and ultimately fall into insolvency, or by companies making divestitures and selling off non-core assets in order to raise funds and streamline their business to weather the crisis and target growth further down the line.
Downturns also make those that typically finance M&A transactions more cautious whether they are banks or private equity firms. This makes it harder for those that do want to target acquisitions to raise the funds they might require.
Of course the other major source of acquisition finance is through the offering of equity, and the value of this, whether quoted or unquoted, will be impaired during a downturn or recession.
Therefore deal volumes and values will both typically drop off, something that can act as a further deterrent to dealmaking, spreading a mood of uncertainty and caution among potential buyers and discouraging potential sellers from going to market.
However, history has consistently demonstrated that the best M&A deals (in terms of the value they deliver for buyers) are often done during economic recessions and that companies that make acquisitions during downturns will often perform better in the medium to long-term than companies that are overly cautious and avoid dealmaking.
With much of the world potentially at risk of entering recession at the start of 2023, businesses might be tempted to put M&A plans on ice and simply look to ride out the crisis. However, companies would actually be well advised to act boldly, rather than being overly cautious, and consider the very real benefits they could see from targeting acquisitions during an economic downturn.
Analysis: The 2001 recession
A prime example of the value that M&A during an economic downturn can deliver is the 2001 recession. The rise of the internet and fears surrounding Y2K led to huge computer and software sales during the 1990s. In the wake of the millennium, sales subsequently plummeted, leading to the collapse of many tech companies. The situation was further exacerbated by the Federal Reserve raising its interest rate several times, as well as the impact of the 9/11 terrorist attacks.
This resulted in an economic downturn that lasted for eight months and, in addition to the USA, impacted many European economies (although not the UK), as well as several others worldwide. In the US, the fallout from the downturn was so severe that, more than a year after the crisis ended, unemployment continued to climb and hit 6 per cent by June 2003.
As is often seen during recessions, M&A activity took a hit during the downturn, with deal volume and deal value both plummeting during and after the crisis. During 2002, even though the recession had ended, aggregate deal value stood at less than half the comparative figure from 1998, prior to the crisis beginning to take hold.
However, numerous analyses showcase the fact that companies that ploughed ahead with M&A during the 2001 recession delivered higher value from these transactions and performed better than their less-active counterparts in the aftermath.
Bain & Company analysed approximately 24,000 M&A transactions that occurred from 1996 to 2006, with the analysis showing that acquisitions carried out during 2001 and 2002 generated close to triple the excess returns of deals completed in the years leading up to the recession.
Analysis from PwC of acquisitions completed by public companies during the 2001 recession, meanwhile, showed that acquisitive companies fared significantly better than competitors in the wake of the downturn. According to the analysis, median shareholder returns at companies that made acquisitions during the recession outstripped their respective industry averages by 2.43 per cent six months after the recession ended and by more than 7 per cent a year later.
M&A during a recession, then, can deliver significantly greater value than deals completed during times when economies are healthier and deal appetite is perhaps greater. Data also shows that it is better for those with an appetite to target deals during a downturn to act early on in the crisis, rather than waiting for sentiment to improve slightly.
Returning to PwC’s analysis of deals completed during the 2001 recession, the report found that deals announced during the first half of the recession produced shareholder returns ten per cent higher than their respective industries a year on, compared to the average of 7 per cent mentioned above.
This suggests that buyers who move quickly when an economic crisis first takes hold will outperform those dealmakers that wait until later on in the downturn and will more fully reap the rewards that M&A deals struck in a recession can deliver.
Overall, M&A conducted during recessions can deliver two key benefits: strengthening the position of buyers against their more cautious competitors and providing them with the strategic options and sources of value to attain significant growth and strong returns in the wake of the downturn.
This practice, which was established over 40 years ago, is available for sale due to the impending retirement of the practitioner.
This practice, which was established in the 1980s, is available for sale due to the impending retirement of the partners.
This practice, which was established around 2003, is available for purchase due to the impending retirement of the partners.
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