Missing out on acquisition opportunities

by Morton Sosland
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Stating that the current dismal economy and the near-term uncertain business outlook explain why merger and acquisition activity in the global grain and grain food industry has been minimal of late would probably meet with little disagreement from executives. But asserting on the basis of this conclusion that the absence of acquisition activity is wrong-headed, that there is no better time to look for growth through acquisitions than during a business downturn like this might prompt strong challenges. Yet, many business economists and historians contend that hesitant executives in the grain industry, as well as in other industries that have managed to do relatively well in these difficult times, are not just missing out on great opportunities, but are doing a costly disservice to their owners. They cite "Invest in a downturn" as a maxim that has especially powerful resonance in an economy as sour as the current one.

Nay-sayers about risking scarce cash and other resources to make acquisitions at the present time point to several reasons for their caution about taking on even relatively small acquisitions, much less the mega-mergers that were commonplace a few years ago. Difficulties in securing capital, through conventional loans or by the sale of bonds or equity, stand at the top of any negative list that might be cited. Ranked almost of equal importance as a bar to acquisitions is the desire to preserve balance sheets, especially the cash positions that seem such an essential asset at a time when outside sources of capital are reluctant to provide funding, for acquisitions and also for normal operations.

Research by McKinsey & Company, the management consulting firm, underscores the advantages of acquisitions coincident with a severe business downturn. It points out that in 75% of the companies it has studied, growth through acquisitions undertaken in tough times created significant value for the company’s shareholders. In examining corporate actions that could be taken during a time of business prosperity, the same study indicates the most to be gained is from divesting. Yet, even with these findings, McKinsey’s research shows that significantly more companies divest during business downturns and make acquisitions during an upturn than would be judged sensible in light of historical returns.

The major reason for what seems to be this totally counterproductive performance is the pressure on management during downturns to focus on ways of reducing costs and maintaining earnings. Ambitious acquisition plans are often deferred or canceled in response to a period like the present one. Yet, as McKinsey concludes, the best and fastest growing companies pursue the course of not just proceeding with acquisition plans but of launching an aggressive effort to expand in such a period. Of course, the study does not advise unrestrained spending in pursuit of acquisition opportunities. Indeed, acquisitions that contribute to reduced costs might be encouraged to take precedence over steps that are aimed solely at expanding revenues.

Favoring acquisitions that cut costs has not yet emerged as a dominant influence in the grain industry, even in theoretical discussions of possible synergies. This is so even though reducing costs in doing a merger is much more easily analyzed and projected than are revenue and earnings gains. Building scale in order to slash costs might well become the new paradigm in the way mergers and acquisitions are considered in the industry. Research by McKinsey indicates that mergers undertaken in order to achieve cost savings are more likely to realize their goals than are targeted revenue-building synergies. Also favoring this approach is the likelihood that bankers will be more willing in the present environment to supply funding for acquisitions targeted at reducing costs than aimed at building revenues and earnings. This is especially the case in light of the cost savings that may assure profit gains at a time when purchase prices reflect the weight of an economy still threatened by severe recession.