Who doesn’t like a little jam on toast with their morning coffee? That’s what the folks at J.M. Smucker must be hoping as they fork out US$3 billion to buy Folgers. The Smucker’s deal is just one of several recent big-ticket takeovers: Verizon Wireless, Delta Airlines and Northwest are all pursuing corporate matchups. With the economy hitting the skids it might seem like an odd time to be gambling billions on such deals, but it turns out their timing couldn’t be better.
According to a new report from Boston Consulting Group, deals undertaken during recessions and slow growth periods outperform those signed in hot markets. Downturn deals are “twice as likely to produce long-term returns in excess of 50 per cent,” the report found, “and on average, create 14-5 per cent more value for shareholders.”
Why is that? Because companies tend to pay too much for acquisitions at the height of the market, when the financing money is
flowing freely and the future looks bright. Since that’s when most mergers and acquisitions happen, it’s no wonder that study after study has shown that most M&As fail to create real value for shareholders. (AOL Time Warner anyone?)
On the other hand, when markets are down, stronger, more efficient companies tend to be the only ones looking to buy. They’re also more disciplined when identifying targets because “every cent counts.”
In Canada, companies clearly prefer to go shopping when markets are hot. According to KPMG, last year saw the highest ever level of M&A activity, with the total value of deals— at $269 billion—tripling since 2005The firm expects the pace of takeovers will slow this year because of tighter credit markets. That may sound like bad news, but if the Boston Consulting Group is right, the deals that do take place in today’s tighter market conditions will be the ones that last. M
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