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April 4, 2020

Buyside Bulletin: Don’t Shelve Your Add-on Program in a Downturn

MHT Partners

In the current economic environment, private equity-owned companies are scrambling to adjust to the current realities brought on by the COVID-19 pandemic and the health-related mitigation efforts that are wreaking havoc on the economy.  As we eventually move out of the current chaotic environment, management teams and their private equity partners would be well served to keep their add-on programs active as the economy recovers.

A recent report from Boston Consulting Group (“BCG”) states their research shows “downturns can be excellent times for deal making.”  BCG reviewed deals over the last 40 years and found that deals completed in a weak economic environment created more value for the acquirer than deals made in a strong economic environment.  BCG’s research shows that buyers’ relative total shareholder return (“RTSR”) after one year for deals done in a weak economy is nearly 7 percentage points higher than deals done in a good economy.  The differential increases to more than 9 percentage points after two years. (1)

A key factor contributing to the outperformance is management teams making bold decisions in a weak economic environment.  The data shows acquisitions outside of the buyer’s core industry segment outperformed acquisitions within the buyer’s core segments; however, both created value with core segment acquisitions showing 4.6% RTSR after one year and non-core segment acquisitions showing 8.5% RTST after one year.

MHT believes having a well-thought-out M&A strategy and a well-vetted potential target list is wise in any economic environment, but it is especially important right now as the current economy may present unique opportunities for creating significant long-term value through strategic acquisitions.  We have seen numerous clients perform very well with their platforms when they have the foresight to invest for future growth, especially when acquiring assets that might be overlooked while others are paralyzed by uncertainty.  We also have observed clients that have leveraged difficult economic situations to expand beyond current core offerings into new products, markets and channels.

Experience Matters

Another key finding of BCG’s report is experience matters.  BCG divided buyers into two categories: “occasional buyers” and “experienced buyers”.  The occasional buyers completed one to three transactions in their data sample while the experienced buyers completed four or more transactions.

When BCG segregated the data based on buyer experience, they found that experienced buyers outperformed in any environment. Experienced buyers achieved a two-year RTSR of 1.1% during strong economic times and a two-year RTSR of 7.3% during weak economic times.  This compared very favorable to the occasional buyer, which had a two-year RTSR of -13.8% in strong economies and a two-year RTSR of 1.4% in weak economies.  This data shows that weak economic times can provide significant value creation opportunities, even for the occasional buyer.  Regarding the occasional buyer, BCG concluded “these analyses also imply that, in general, occasional buyers should not shy away from doing M&A deals, especially in downturns.  Indeed, they should regard a weak economy as an opportunity to gain experience, because depressed asset prices (as reflected by lower deal multiples observed during the Great Recession) increase the margin for error in deal making.” (1)

It may take several months for the current volatility to subside and a reasonable environment for deal making to return.  As we experienced first-hand in 2009 and 2010, MHT believes savvy acquirers can refine their M&A strategies and develop well-vetted target lists in the near term, so they are prepared to launch (or relaunch) their acquisition programs when the market environment allows and ahead of improving valuations.   Our acquisition team helped several of our private equity clients execute transformative strategies during the last downturn.

MHT Partners is a leading national middle market investment bank with a high-performing team uniquely qualified to serve dynamic, growth-oriented companies.  We leverage our transaction execution and strategic advisory skills to develop and execute the value-building acquisition strategy that’s optimal for each client.  If you are an occasional buyer, we can add valuable experience and resources to your team.  If you are an experienced buyer, we can add additional firepower and capability to your effort to help you create and execute value-creating, add-on deal opportunities during the economic downturn.

To learn more about our Acquisition Advisory practice, please contact Kevin Jolley (kjolley@mhtpartners.com) or Shawn D. Terry (sterry@mhtpartners.com).

(1) The 2019 M&A Report, Downturns Are A Better Time for Deal Hunting, The Boston Consulting Group

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