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Double Dip M&A? Amidst possibilities of another global downturn, what will the m&a scenario for the coming quarters be?
B&E & IIPM Think Tank present the M&A update 2011-12, Including a Primer on M&As across The Globe this year and analysis on Major Sectors of India that are ripe for M&A
Issue Date - 18/08/2011
The B&E/IIPM Think Tank mergers & acquisitionSreport, 2011-12
As US corporate profits reach 60-year highs and global economies start accelerating, M&As are coming back with a bang. In fact, investors have already started flexing their muscles as new capital starts flowing into their funds. Yet, with the global economy facing the possibility of another downturn, is the corporate world ready for consolidation? Will buyers and sellers indulge in as frenetic an activity as seen in the pre-recession days? Or will the coming quarters be a damp squib on takeover sentiments? B&E and IIPM Think Tank present the M&A update for 2011-12

Companies spend more than $2 trillion on acquisitions every year, yet the M&A failure rate is between 70% and 90%…” When Profs. Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck of the Harvard Business School wrote these words in their March 2011 seminal work titled ‘The New M&A Playbook’, they must have wondered what’s ‘new’? Nothing actually. Irrespective of the year one takes, the failure rate of M&As has more or less always bounced between the percentages they mention. Yes, there have been good years, when the failure rate has defied expectations and has been only around 60%. And there have been bad years, when almost every M&A attempted destroyed shareholder value. But that’s about as much as one needs to know about M&As. From Accenture to McKinsey, from BCG to Booz Allen Hamilton, from Stanford to Wharton, there is little debate left globally on whether M&As add to shareholder value... they don’t. In fact, most destroy it with surety. But then, why do CEOs globally still go ahead and attempt mergers and acquisitions?

One line of thinking compares the M&A behaviour of CEOs to cigarette smoking. There’s no debate on whether smoking causes cancer. It does. Yet, one would find pretty sane, intelligent and bespoke individuals indulging in the exercise. Logically understood, the attitude is quite addictive, whether for smoking or for M&As. CEOs get infatuated to the M&A dopamine high and the rush of seeing their companies’ turnovers double, even triple overnight – and not because of any strategic moves they might have made in the marketplace, nay any innovation, or a product launch. But simply, an M&A; “The bigger the ego of the acquiring company’s CEO, the higher the premium a company is likely to pay for a target,” write Dr.Mitchell Marks and Dr. Philip Mirvis in their 2011 paper in Journal of Business and Psychology, quoting varied research studies. There’s another line of thinking that says that as the average probability of success of a new business anyway falls between 10% and 30%, an M&A activity should not be considered anything different. The success rate of an M&A exercise mirrors what one would expect from a new business venture; and therefore CEOs should necessarily take it up, as there are 10% to 30% M&As that are superlatively succeeding too in maximizing shareholders’ wealth. Be that as it may,

The fact is that whether M&As are used for survival or for growth, they’ll remain one of the most glamorous strategies a CEO could ever employ.

And to that extent, it has been an interesting first half of the year 2011, which just about took us through everything the world (read: corporate) has been through over the last 3-4 years. From prosperity at the bourses, to shareholders suddenly crying out for mercy; from an economic boom to a devastating recession, the world has been through a roller-coaster ride all these years. Needless to say, the scenario had also affected the appetite for mergers & acquisitions (M&As) across the globe. After all, investor sentiment, consumer demand, and most importantly financing was simply not there for deals to happen. But, as US corporate profits reach 60-year highs and global economies start accelerating, M&As are definitely coming back with a bang. In fact, financial investors have already started flexing their muscles as new capital starts flowing in their funds. But is the corporate world ready for consolidation – across geographies, across industries – once again? And if yes, which sectors are ripe for consolidation? Or, are these moves by companies just add-on efforts to stay relevant amidst yet another recession (a double dip) that has not only started haunting the US, but also several economies across the euro zone and is also giving sleepless nights to the world at large?

The numbers look stunning. Global M&A deal value reached $1.16 trillion in the first half of this year, registering a 27.9% increase from last year levels. Although the deal volume was down by 2.7%, from 5,843 announced deals in H1 2010 to 5,684 announced deals in H1 2011, the ongoing trend suggests that while the larger, cash-rich buyers are prepared to spend, their smaller counterparts are playing a waiting game, sceptical of making commitments in an uncertain economic climate. But despite the dip in the volume of deals, there’s potentially good news on the supply side, as previously frustrated sellers recognise that the market is now open for business – even if it is not quite as hot as they would like. These sellers include private equity (PE) players, which need to sell assets (which they have been holding for long) in order to move forward. In fact, the first half of 2011 was the busiest six-month period since H1 2008 with closed deals worth $1,266.1 billion. While the largest deal so far this year is Deutsche Telecom’s $39 billion disposal of T-Mobile USA to AT&T (the largest corporate deal since ExxonMobil’s $40.6 billion acquisition of XTO Energy in December 2009), Johnson & Johnson’s $21.2 billion acquisition of Switzerland-based Synthes GmbH stood a distant second. Even cross-border M&As saw the busiest six months since 2008. Deals by individual countries announced in the first half of 2011 added up to $468.1 billion; registering a whopping 53.3% increase since H1 2010.


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