Best of times or worst of times to make some acquisitions?
This is one area where the head/heart divergence may be more radical than
usual—and where it could really cost you.
Here’s how McKinsey poses the dilemma:
"As the credit crunch threatens to become a global downturn, corporate
leaders have a choice: pull in their horns and ride out the storm or look
for opportunities to pick up bargain-basement assets that will help them
grow and create future value for shareholders. If past is prologue, more
will follow the first course—which is a mistake."
The head/heart opposition is simple to understand: While your head tells
you that one of the best times to invest is in a downturn, that’s precisely
when your heart quails. "Buy low, sell high" is advice so impeccable
as to achieve the truly advanced state of tautological, but "buy high, sell
low" is more descriptive of the way people actually behave across economic
cycles.
I may not be able to change your heart—only you in league with your
spouse or your shrink can do that—but I can at least hope to arm you
with the intellectual fortitude to mount a stalwart case for exploring some
acquisitions now, in the teeth of the fretful and querulous naysayers.
Based on a survey of over 200 global companies, the authors (who also collaborated
on the May 2008 book The
Granularity of Growth), derive two pivotal conclusions: The
most powerful way to position one’s firm for growth coming out of a downturn
is through selective acquisitions during that downturn, and, conversely and
with wonderfully rewarding and symmetric logic, during an upturn selective
divestitures create slightly more value than acquisitions.
If only people behaved that way:
This shows the actual behavior across a sample of 537 product/service
lines (from 187 companies) between 2001 and 2004, in reaction to a "major"
(> 10%) upturn (top blue bars) or downturn (bottom green bars). Essentially,
the lessons are:
- Companies are more likely to divest during a downturn;
- And more likely to acquire during an upturn;
- While the reality remains that during both upturns and downturns the most
likely course of action of all is simply to do nothing.
Again, this is understandable. But that, I would argue, is less an excuse
than an indictment of conventional wisdom.
Do you want to "protect your balance sheet" during a downturn? Sounds
logical. (And, to be sure, some firms simply aren’t in a position to
do otherwise.) And as revenues flag and margins are compressed, you may
focus on cutting costs and trying to at least match previous periods’ earnings
levels.
But the savviest growth companies do otherwise. Famously (as even the
usually somnolent business coverage of The New York Times realized in
1999), GE Capital immediately went on a capital spending binge following the
Asian financial meltdown in 1997:
The last two years alone, [GE Capital] has made at least eight major investments
[…] [T]he 1997 Asian financial meltdown and resulting recession turned the
in four Asian countries, expanding its assets to about $20 billion in the
region. Acquisitions included two consumer-credit businesses, a life insurance
company and a $5 billion leasing company in Japan, a consumer-credit business
and a portfolio of car loans in Thailand and a life insurance unit in the
Philippines. It also has its sights on a stake in a South Korean bank.
area into a vast bargain basement. Here was GE Capital’s chance to buy up
distressed companies and establish itself in the one part of the world where
it lacked a strong presence.”There’s no question that financial turmoil has resulted in an environment
that facilitates deal creation,” Denis J. Nayden, president of GE Capital,
said in a telephone interview from the company’s headquarters in Stamford,
Conn. ”Yes, we have moved into that opportunity.”
In other words, countercyclical growth works.
If you’re in a position to do so, think about trying some for yourself. You
may like where you’ll end up on the other side of this credit markets lockdown.
