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The 2019 M&A Report
DOWNTURNS ARE A
BETTER TIME FOR DEAL
HUNTING
JENS KENGELBACH
GEORG KEIENBURG
MAXIMILIAN BADER
DOMINIK DEGEN
SÖNKE SIEVERS
JEFF GELL
JESPER NIELSEN
3 EXECUTIVE SUMMARY
2 6 APPENDIX I: METHODOLOGY
The net result for 2018, though, was a largely stable year in which global
M&A value increased moderately despite declining volume. A 7% uptick
left the global value near the five-year average. But after a strong first
quarter, deal value declined steadily throughout the rest of the year. The
fast start was attributable to a flood of megadeals (deals valued at $10 bil-
lion or more)—17 in the first three months versus 14 thereafter. In the first
half of 2019, M&A value stabilized near the long-term average while vol-
ume dropped significantly. The rebound in value was propelled by strong
levels of North American dealmaking, supported by several megadeals,
especially in the second quarter.
What will happen next? Several trends are likely to promote M&A activity.
Corporations have ramped up sell-side activities, in some cases seeking to
placate activist investors. Similarly, private equity firms are exiting
investments to cash in on the returns achieved in the recent positive
environment. At the same time, high levels of liquidity and low interest
So far, so good. But the wild card here is the macroeconomic environment.
Through several years of persistent political uncertainty and market vola-
tility, the M&A market has remained resilient. Today, however, dealmakers
must come to terms with the fact that the global economy is most likely in
the later stages of the cycle. Trade wars, Brexit, weakness in China’s econo-
my, forecasts of slower growth, and ominous leading economic indicators
are among the issues weighing down sentiment in capital markets. With
storm clouds building, what can forward-looking dealmakers do to get
ready for a recession?
We analyzed a unique data set totaling more than 51,600 deals made over
the past 40 years that met our study criteria (out of our total M&A data-
base of more than 750,000 deals). We found that, two years after a trans-
action, deals made in a weak economy created more value for buyers than
those made in a strong economy. Boldness pays off—the outperformance is
largely driven by acquisitions outside the buyer’s core business segments.
And, although occasional buyers create value through acquisitions in weak
economies, experienced buyers outperform by a wide margin.
•• Europe and North America drove the global increase in deal value
in 2018, with growth rates of 7% and 5%, respectively. Among other
regions, only Latin America saw growth in deal value. Deal volume
declined in all regions. Some industries posted increases in deal
value, owing to outlier effects from a few large deals. However,
nearly every industry saw a decline in overall M&A volume.
•• In the first half of 2019, M&A value stabilized near the long-term
average. However, several alarming trends persisted. Europe and
Asia-Pacific experienced sharp declines in deal value compared
with the first half of 2018. Only North America saw an uptick in
deal value, with US megadeals fueling the global rebound in M&A.
In all regions, deal volume declined versus the first half of 2018.
Most industries experienced a decline in deal value versus the first
half of 2018—notable exceptions included energy and power and
industrial companies, which saw double-digit increases. All
•• High cash levels and dry powder are driving demand. Among the
S&P Global 1200 (excluding financial institutions and insurance
companies), cash holdings totaled $2.4 trillion in 2018, down
slightly from 2017 but still 21% above the level in 2013. Among PE
firms, reserves of dry powder increased by 15%, continuing the
streak of annual records.
•• In recent years, the M&A market has shown an unusually high level
of resilience in the face of persistent political and economic uncer-
tainty. Macroeconomic fundamentals have remained strong enough
to support a healthy level of M&A activity. However, the cooldown
in the second half of 2018 showed that resilience has its limits.
Exhibit 1 | Global M&A Value Increased Moderately in 2018 Despite Declining Volume
After a strong start in Q1, M&A activity cooled down significantly… …while total deal value remained
stable near the five-year average
Deal value ($billions)1 Number of deals Deal value ($billions)1
1,500 10,000 3,920 +7%
3,135 3,059
7,500 2,870 2,868 Ø
1,000
5,000
500
2,500
0 0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2014 2015 2016 2017 2018
Exhibit 2 | Volume Dropped Significantly in H1 2019 While Megadeals Pushed Value Above Average
2,500 20,000
18,373 18,301
17,234
16,378
15,672 15,395
2,000 14,670 14,874
14,135 15,000
13,701
1,500
Ø 1,300 10,000
1,000
1,749 1,843
1,614
1,501
1,344 1,303 5,000
500 1,094
838 865 844
0 0
H1 H1 H1 H1 H1 H1 H1 H1 H1 H1
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
15.0 40
12.5 Ø 30.6
Ø 12.0 30
10.0
20
7.5
10
5.0
0
1990 1995 2000 2005 2010 2015 2018 1990 1995 2000 2005 2010 2015 2018
18.5%
0.0
20.0
–0.4%
–2.0
10.0
–3.0 5.0
–4.0 0.0
1990 1994 1997 2000 2003 2006 2009 2012 2015 2018 1990 1994 1997 2000 2003 2006 2009 2012 2015 2018
Exhibit 5 | Elevated Cash Levels May Support M&A in the Near Term
1.5 0.5
1.0
0.0
2013 2014 2015 2016 2017 2018 2004 2006 2008 2010 2012 2014 2016 2018
0 4
2009 2011 2013 2015 2017 H1 2009 2011 2013 2015 2017 H1
2019 2019
volume) has doubled since 2013. (See Exhibit partnerships within a single industry are
6.) Increasingly, the objective of deals is not giving way to multilateral cross-industry
to take control of a company but rather to partnerships, potentially involving dozens of
gain access to specific capabilities, talent, or players. Because such ecosystems are fluid
technology or to establish partnerships. Two and dynamic, and not perfectly controllable,
related developments are promoting the shift dealmakers will need to utilize a wider range
in emphasis. of deal types and consider different depths of
integration.
First, the increasing prevalence of tech-
enabled business models is blurring the These two developments are giving rise to
boundaries between industries and leading more cross-industry transactions. In this con-
to the convergence of previously distinct busi- text, nontraditional deals—including joint
ness sectors. For example, the distinction be- ventures and alliances, corporate venture
tween mobility companies and technology capital investments, and the purchase of mi-
companies has blurred, as ride-hailing apps nority stakes—are gaining importance.
(such as Uber, Lyft, and Didi) and developers Several recent announcements illustrate the
of self-driving vehicles (such as Waymo, a growing role of alliances:
subsidiary of Alphabet) enter the sphere of
automakers and other traditional mobility •• In January 2018, Amazon, Berkshire
players. Similarly, traditional banks and insur- Hathaway, and JPMorgan Chase an-
ers face increased competition from “fintechs” nounced that they would form an inde-
and “insurtechs” as well as digital payment pendent health care company to provide
providers. Industry convergence is also occur- services to their employees in the US.
ring between the telecommunications and
media industries, as evidenced by AT&T’s ac- •• In September 2018, Netflix and numerous
quisition of Time Warner. camera equipment, editing, color correc-
tion, and encoding companies created the
Second, as companies increasingly integrate Post Technology Alliance. The objective is
technology into their products and services, to ensure that participating companies’
complex ecosystems are emerging throughout products comply with Netflix’s content
the business landscape and across industries. specifications.
To bring together all the required elements of
technology-enabled offerings, companies •• In May 2019, Toyota participated in a
must work with a far wider range of partners funding round for Uber’s self-driving car
than in the past. Traditional bilateral unit, Uber Advanced Technologies. Other
110
106.4 106.1
Weak-economy deals
105
100.4
9.6
100
100.2 99.7
96.5
Strong-economy deals
95
90
T-3 T+3 Year 1 Year 2
economy deals translates into an RTSR one We then analyzed the difference in perfor-
year after the announcement of 6.4%. The mance of core versus noncore deals. In our
gap between strong- and weak-economy overall sample, capital markets perceive core
performance grows to more than 9 segment acquisitions more positively on an-
percentage points two years after the deal. nouncement (CAR is 0.1 percentage point
higher). (See Exhibit 8.) However, this effect
In this analysis, we used realized GDP growth is driven mostly by the subsample of
as the benchmark for comparing perfor- weak-economy deals; core segment acquisi-
mance. We reached similar results in bench- tions have a CAR of 0.6%, compared with
marking performance against the forward- 0.2% for noncore deals. Among other factors,
looking Economic Policy Uncertainty Index. higher levels of risk aversion during a weak
The similarity in findings implies a stable re- economy may be leading capital markets to
lationship between post-deal RTSR perfor- favor acquisitions of businesses within the
mance and the state of the economy at deal buyer’s industry.
announcement. The remaining analyses in
this chapter use realized GDP growth as the Looking at the medium term, we observed a
benchmark. reversal of market preferences: noncore deals
create more value for buyers (one-year RTSR
of 4.0% for noncore versus 3.0% for core).
Why Do Buyers Outperform Again, the subset of weak-economy deals
in a Weak Economy? drives this result. In a downturn, noncore
Which specific types of deals are responsible deals outperform by a large margin: one-year
for buyers’ outperformance in a weak RTSR is 3.9 percentage points higher than for
economy? To find the answer, we considered core deals. During good economic times, by
the short-term capital market reaction (in contrast, noncore deals destroy value for the
terms of CAR) as well as buyers’ mid-term buyer (RTSR of –1.0%), while core deals pre-
value creation (in terms of one- and two-year serve value (RTSR of 0.0%). Investors appar-
RTSR). ently prefer that companies focus on their
core businesses in good economic times,
We compared the business models of the while they appreciate diversification in weak
buyer and the target to determine if the ac- economic times.
quisition involved a target within the buyer’s
industry (that is, a “core” deal) or outside the Our findings point to two imperatives for
buyer’s industry (that is, a “noncore” deal). dealmakers:
CAR (%) One-year RTSR (%) CAR (%) One-year RTSR (%)
+3.9
+1.0
8.5
4.0
4.6
3.0
–0.4
0.6
–0.1
0.3 0.2
0.2
•• First, during downturns, have the courage sellers of assets. (See the sidebar “Is It Wise
to stay the course. A company that has a to Divest in a Weak Economy?”)
well-considered transformation strategy
should not alter its plans when it faces the
prospect of a negative short-term reaction How Do Economic Conditions
by capital markets. Although core segment Affect Execution?
deals are greeted more favorably by In addition to strategy and target selection, a
markets around the announcement date, well-executed M&A process, with the appro-
medium-term value creation is higher for priate due diligence, is essential for creating
companies that make bold moves to value. How does the economic environment
acquire attractive targets beyond their influence the effectiveness of the process?
core industry. The higher returns might be The time between deal announcement and
partly attributable to the lower average closing is a proxy for the efficiency of the
deal multiple paid for noncore assets. buyer, the complexity of reaching the closing
conditions, and the length of the overall M&A
•• Second, in a strong economy, resist the process. We looked at how three variables—
temptation to go on a buying spree or to the economic environment, the industry of
follow the crowd in acquiring the most the target, and the type of target—affect the
sought-after assets. Our research makes length of this time period.
clear that strong-economy deals deliver, at
best, only modest returns. In fact, after a Not surprisingly, as a group, weak-economy
year, on average, noncore acquisitions deals take longer to close than strong-
destroy value. Corporate decision makers economy deals—regardless of whether the
who simply follow the herd, without a clear target is public or private or in a core or
strategic rationale for their acquisitions, noncore segment of the buyer. (See Exhibit
will eventually destroy shareholder value. 9.) Several factors may account for this
Academic research supports the view that finding. The decision-making process may
an undisciplined, herd mentality is broadly take longer in a weak economy, because
responsible for the underperformance of boards take longer to analyze and approve
strong-economy deals on average. the deal and shareholder meetings take
longer to prepare for. The due diligence
Economic conditions, as well as the target’s process may be more thorough and thus take
industry, also affect value creation for the longer to complete. Acquirers also need more
–6.2
–0.3 6.3
3.2
2.9
0.1
Activity
Strong Negotiation/bids
economy
Due diligence
Integration
Activity
Weak Negotiation/bids
economy
Due diligence
Integration
time to arrange for debt financing. This difference becomes even more apparent
Additionally, a less competitive M&A market when you look at the subsamples of strong-
may reduce incentives to complete the and weak-economy deals. Experienced buyers
process rapidly. can create value from M&A in any economic
environment (two-year RTSR of 1.1% in a
strong economy and 7.3% in a weak econo-
Experienced Buyers my). Remarkably, they achieve this value
Excel in Downturns creation even as the overall sample of strong-
Does dealmaking experience make a differ- and weak-economy deals experiences, on av-
ence with respect to value creation in a weak erage, a negative two-year RTSR.
economy? To find the answer, we distinguished
between two types of buyers: “occasional” Occasional buyers, in contrast, fail to create
buyers completed one to three transactions in value from acquisitions in upturns—and are
our data sample; “experienced” buyers com- obviously responsible for the value destruction
pleted at least four transactions in the sample. observed in the overall sample. In fact, they
destroy value by a significant margin (two-year
Confirming the results of research discussed RTSR of –13.8%). In weak economic times,
in our 2016 M&A Report, we found that occa- they are able to deliver some value creation
sional buyers earn a higher CAR on an- from M&A (two-year RTSR of 1.4%), but clear-
nouncement than experienced buyers (0.7% ly lag behind the experienced buyers’ returns.
versus 0.2%). This is likely attributable to a
positive surprise effect. Medium-term value Overall, experienced buyers create more val-
creation is, however, negative for the occa- ue than occasional buyers—and this is partic-
sional buyers (two-year RTSR of –6.6%). By ularly true in a weak economy. These analy-
contrast, experienced buyers apply the ses also imply that, in general, occasional
knowledge gained from their previous deals buyers should not shy away from doing M&A
to generate significant value (two-year RTSR deals, especially in downturns. Indeed, they
of 5.3%). (See Exhibit 10.) should regard a weak economy as an oppor-
CAR (%) Two-year RTSR (%) CAR (%) Two-year RTSR (%)
5.3 7.3
0.7
0.2 Occasional
tunity to gain experience, because depressed Our research and experience indicate that a
asset prices (as reflected in the lower deal number of characteristics set experienced
multiples observed during the Great Reces- buyers apart from occasional dealmakers.
sion) increase the margin for error in deal- The next section explains how all companies
making. Of course, every acquisition should can excel at M&A dealmaking during a
still be rooted in a clear-cut strategic ratio- downturn.
nale and sound financial considerations.
How do experienced buyers achieve superior Companies that have superior operational
value creation in core deals, including roll-ups capabilities are better equipped to withstand
and consolidations? Important skills include cost pressure in a downturn. Best-in-class com-
the ability to conduct a thorough and accu- panies have an advantage in M&A as well, be-
rate assessment of the importance of addi- cause they can apply their capabilities to create
tional scale and scope in the industry, the tremendous value at poorly performing targets.
synergy potential, and the associated risk. For But does M&A experience make a difference?
example, can large-scale mergers or acquisi- To investigate, we used EBITDA margin as a
tions, which are usually complex, succeed in proxy for a company’s performance relative
Exhibit 11 | Experienced Buyers Extract More Value from Core Deals in a Downturn
+0.5 +2.6
1.1 8.6
6.0
+0.3
0.6 0.5
–1.2
2.1
0.2 0.9
Non-core Core
Exhibit 12 | Experienced Buyers Earn Strong Returns No Matter How Well a Target Has Performed
–10.1
–5.0
Occasional Experienced
Occasional Experienced
Well-performing target Underperforming target
Equation 1 +3
CARi = ∑ (Ri,t – E(Ri,t ))
t = –3
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to the buyer the seller to the buyer to the buyer to the buyer
€910M AUS$10B Value not disclosed $200M Value not disclosed
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Strategic advisor to Strategic advisor to Strategic advisor to an integral part Strategic advisor to
the seller the seller the buyer of PMI preparation the buyer
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the acquirer in Strategic advisor to Strategic advisor to Strategic advisor to Strategic advisor to
JV transaction the buyer the buyer the seller the seller
c. $40B $2.9B Value not disclosed €4.6B $74M
combined their
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the buyer the buyer to the buyer the seller an equally owned
Value not disclosed Value not disclosed $2.8B €1.7B joint venture
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to the seller the seller in IPO to the seller the seller
$3.15B Value not disclosed €1.9B Value not disclosed
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the buyer; strategic Strategic advisor to Strategic advisor to Strategic advisor to Strategic advisor to
advisor on PMI the buyer the seller the seller the seller
$24B $160M €21.8B $7.5B $710M
Subsea cables
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the buyer the buyer the buyer the seller
Value not disclosed $0.9B $5.2B €8.0B
Boston Consulting Group publishes As Tech Transforms Auto, Deals How the Best Corporate
many reports and articles on Are Booming Venturers Keep Getting Better
corporate development and finance, An article by Boston Consulting Group, A Focus by Boston Consulting Group,
M&A, and PMI that may be of August 2019 August 2018
interest to senior executives. The
following are some recent How Bold CEOs Succeed at M&A What Really Matters for a
examples. Turnarounds Premium IPO Valuation?
An article by Boston Consulting Group, An article by Boston Consulting Group,
July 2019 July 2018
The M&A Way into Distributed The 2017 M&A Report: The
Energy Technology Takeover
A Focus by Boston Consulting Group, A report by Boston Consulting Group,
March 2019 September 2017
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