Double shareholder returns by completing deals during times of economic stress

Analysis from Deloitte, the business advisory firm, shows that companies can almost double their shareholder return by completing deals during an economic slump.

The analysis of over 110 of the largest completed acquisitions over a ten year period from 1996 - 2006 highlights a two-year return of 12.1% over the peer group average for those UK businesses which announce deals negotiated in a downturn. This compares with just 6.1% for those which announce deals in a more buoyant market. Earlier this year, Boston Consulting Group produced similar findings where downturn deals showed better returns for shareholders.

Andrew Curwen, global head of transaction services at Deloitte commented: "If we look back in history, it's clear that some very successful deals have been done in periods of economic stress."

For example, in the late 90s during the Asian Financial Crisis, those well capitalised buyers who invested in their M&A capability picked up some relative bargains. Clearly, access to finance and timing is critical and smart companies are now taking another look at the market and positioning themselves to move quickly. Opportunities to buy assets from stressed or distressed owners can, in the current environment, appear at a moments notice."

Leor Franks, director of practice development and author of the research said: "Whilst it's logical that lower prices offer greater upside, our research shows that acquisitions in a downturn offer twice the differential return of those completed in a period of stronger growth. This may encourage an increase in deal activity as those organisations that are ready and able to buy increasingly take advantage of opportunities. In fact our recent CFO survey showed that for the first time since the beginning of the credit crunch, CFOs have a positive outlook for M&A activity levels."

When the Business Sale Report asked Deloitte for more detail on the methodology used in the survey, the accountancy firm pointed out that it was a very informal piece of research. Deloitte's methodology and sources were as follows:

The research started by analysing the largest 225 all-UK completed acquisitions by listed companies announced over a ten year period from 1996-2006, of which 110 provided sufficient data for analysis. The data was sourced from Bloomberg.

The methodology is set about below:

Analysts at Deloitte identified the peer group of each of the 110 acquirers, and calculated the total shareholder return for the acquirer and the peers with start date as the date the deal was announced, and end date as the date two years later.

Subtracted the median total shareholder return for the peer group (and this excluded all peers that didn't have data on Bloomberg for various reasons) from the total shareholder return of the acquirer. This gave the relative total shareholder return of the acquirer

Sorted all the deals/acquirers by their date of announcement, and divided the 110 deals into two groups - deals done during an above average GDP growth quarter, and deals done during a below average GDP growth quarter

GDP growth in a particular quarter is the growth in GDP in that quarter compared to the same quarter in the previous year, and the average GDP growth in the period was 2.9%

Calculated the average of the relative total shareholder returns of the acquirers in each group: The average for the two year relative total shareholder return for the acquirers that have done deals during a below average GDP growth quarter was 12.1% and the average for the above average group was 6.1%

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