Chance Favors the Well-Prepared Acquirer

Chance Favors the Well-Prepared Acquirer

          
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Chance Favors the Well-Prepared Acquirer

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    In This Article
    • Early preparation is essential. You can’t predict when a new dealmaking opportunity will come up.

    • Strike when the time is ripe; good timing is more of a factor than it has ever been.

    • Be clear about what distinguishes foreign deals from domestic deals. Investors view them very differently.

     

    What specific moves should business leaders be making to ready their organizations for tomorrow’s deals? Time and again, across all kinds of industries and geographies, BCG has identified the following imperatives.

    The 2012 M&A Report

    Three Evergreen Imperatives

    Prepare thoroughly before a deal materializes. Early preparation is essential. It’s hard to predict when an opportunity will surface. Being able to seize a favorable position depends on identifying and screening targets in advance so that the company can be ready to pounce when prices for attractive targets start falling. Deal-savvy companies ensure that they have explicit breakdowns of the relative contributions of inorganic and organic growth to their long-term business objectives. They are clear about the value of pursuing acquisition targets in adjacent industries as well as targets in their own industries. They have very clear roles and responsibilities for dealmaking, and the responsibility for identifying potential targets is shared widely throughout the C-suite. Some of the best-prepared companies even hold mock board meetings where hypothetical deals are discussed.

    Strike when the time is right. Timing is crucial. Indeed, it is more of a factor than ever before. Today, windows of opportunity are narrower, financing conditions change faster, due diligence is accelerated by the intensity of the competition, and dealmaking processes are becoming more and more professionalized. A good time to pursue acquisitions is just at the start of a recovery in the global economy. Of course, it is extremely difficult to forecast economic turning points, but there will be signs—for example, a reduction in order backlogs—in one’s own industry. Companies can also create superior value at the start of an M&A wave in their industry. In both instances, first-mover advantage stems from there being less competition from other bidders. Furthermore, valuations will not yet have been bid up.

    Actively target private companies or subsidiaries. It is important for business leaders to get regular updates and valuations on potential opportunities—private companies or subsidiaries as well as publicly owned targets. Public companies that buy private companies or subsidiaries fare better—by 2.3 percentage points of CAR—than those that acquire other public companies. In many cases, private targets are more attractive because their typical lack of liquidity means that they usually sell at a discount.

    Be clear about what distinguishes foreign deals from domestic deals. Investors tend to prefer cross-border deals if the target is publicly held and domestic deals if the target is private. Why? BCG’s experience indicates that investors believe that they can more easily assess the value of a foreign target if it is listed—a clear plus since they already view cross-border deals as more complex than domestic transactions. When the target is a private company or a subsidiary of a listed company, domestic deals produce marginally higher short-term returns than acquisitions abroad. The value of a private company or a divested subsidiary in another country is much harder for investors to gauge. What investors are looking for is the growth potential in foreign acquisitions, especially when companies expand into robust emerging markets. But because of the cultural and logistical complexities of running a new foreign operation, cross-border deals can be riskier.

    Understand which deals call for cash and which call for stock. For public targets, paying with cash is preferable because it reduces management’s discretionary funds and signals strong belief in the deal. However, in acquisitions of private companies, stock is often the better choice: the former owner becomes a major shareholder that may be highly motivated to monitor the investment closely and hold management to high standards.

    Companies that prepare well today for the next surge in global M&A activity will be able to act when the time is right—for them. They will have the knowledge, the resources, and the dealmaking processes in place to move promptly, intelligently, and forcefully. That’s a recipe for delivering value under any market conditions.

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