Newsletter – May 2009
Mergers and acquisitions, a pendulum swing
Mergers and acquisitions, is yet another area being transformed by the current economic downturn. Hit hard by the credit squeeze, M&A activity is starting to show signs of life again, although transactions now look significantly different from those that were closed during the long period of economic growth that ended in 2007. The main reason behind the changes? It is the increasing weakness of companies that is the main driver now, and not anymore their strength.
During periods of sustained growth, M&A transactions are based on the rather unproven concept of “1+1>2”, that is the intent to create synergies that bring the newly formed entity to the next level in terms of its ability to conquer market opportunities. Even if the facts tend to demonstrate that more value has been destroyed than created by these moves, their objectives are laudable. Ranked by importance, these objectives are: first, identify and implement the synergies that will boost growth. Second, preserve the existing components of the value of the new entity. And third, bring about the economies of scale that will make the new entity more efficient.
In today’s economic climate, other motives will underpin transactions. Acquisitions are the starkest illustration of that phenomenon. Because of the continuing deterioration of their position, many companies are increasingly unable to resist take-over offers. In the current atmosphere, acquisitions will have a distinctively “Darwinian” flavour, where the niceties of the previous periods are brushed aside and two key objectives emerge: asset picking and/or elimination of a competitor, pure and simple. The recent acquisition of Sun Microsystems by Oracle seems to match that pattern. One or two of the company’s assets (one of them the “Java” software) is said to have driven the offer made by Oracle, and alarming rumours transpire regarding the consequences of the deal for Sun Microsystems’ employees…
SMEs are particularly vulnerable in that context. Often lacking the critical size that would allow them room for manoeuvre, and very quickly cornered by deteriorating market conditions, these companies are often easy preys in particular for the bigger players in their own industry. In such cases, the need to find a suitable and reliable partner, and preferably one with good intentions, can become acute fast.
For mergers, the change will naturally be less brutal, but by no means less significant. The pursuit of a “synergized” future is no longer top of the agenda in times of economic slowdown and low visibility. The order of the day is survival of companies through the defence of market share and cost cutting. Crisis mergers are defensive in nature. Compared to the “fair weather” transactions mentioned above, the order of priorities is reversed: the key objective has to be the detection and implementation of efficiency measures. After that come, first, the preservation of existing components of the value of the new entity, and only then, postponed to the time of the recovery, the search for a synergetic potential.
The feeling seems to be, in general, that theses defensive mergers will be easier to execute than those that took place before 2008. After all, the over-ambitious objectives are off the table, and the economic crisis makes employees more understanding. That is true, but a massive challenge has crept up the agenda of these mergers: economies of scale between the parties must now be detected and implemented within the shortest of timeframes if the mergers are to achieve their key objective; survival. In the “fair weather” mergers of years past, economies of scales took years to become reality, if they did at all.
There is no doubt, success for defensive mergers will just be as hard to achieve, than it was for their “fair weather” counterparts. The challenge this time around will be to preserve the value creation mechanisms that allow companies to defend market shares while bringing compatibility to a diverse set of business processes and tools, all within a very short time frame. A high stakes exercise to be performed with close to no visibility.
Edgar Brandt Advisory SA
