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Time to Consolidate
According to experts, consolidation across many industries is already well underway as companies with positive balance sheets take advantage of increasing numbers of distressed or bankrupt businesses struggling to make it through an extended recession. Whether it's to expand an existing part of the business or diversify now is a great time for firms to grow through strategic M&A activity if they are able to.

As Carlos Keener, Founding Partner, Beyond The Deal says: "Pending any further banking or market instability, [consolidation] is likely to increase into 2010. Despite the high profile problems in some industries, M&A activity is hitting most sectors. Behind the 'shotgun marriages' in banking and automotive this year, we've actually seen a quiet predominance of 'safe haven' deals in sectors such as IT, media, defence and pharmaceuticals."

So what will consolidation look like in a changing global environment? Clearly, business leaders need to err on the side of caution when buying these types of assets, no matter how attractive the deal may appear. Abbas Hussain, President of International Emerging Markets, GlaxoSmithKline explains: "A good deal is one that beats financial hurdle rates and where you believe that you can do better with the company than its current owners."

Carlos expands: "Those wanting to buy up distressed or bankrupt businesses need to make sure that 'deal-of-a-lifetime-at-half-the-going-price' doesn't become a deadweight that drags them down. Acquirers must use due diligence and integration planning to make sure that they will be able to address the financial, operational and, most importantly, managerial issues likely to underpin the poor performance of the target. Companies need to do a thorough assessment of their own capabilities as well as those of the target. The question is not 'how sick is the target?' but, given that we are about to 'acquire' its illness 'how good of a doctor am I?"

While consolidation will still have to prove it adds shareholder value, the main drivers of activity going forward are likely to be board-led, especially, as Abbas points out, "as companies are forced to reduce cost on slow top line growth." The shape and nature of deals is also likely to change as this new environment presents a number of challenges to those looking to consolidate. Jonathan Garbett, Partner, The Delphi Partership LLP, explains: "Deals will take a long time to conclude with barriers to overcome including continuing uncertainty over earnings forecasts and the gap between the price expectations of buyers and sellers. Activity will be largely board-led with 'encouragement' from shareholders and lenders - this is no market for hostile moves without access to full information on the part of the buyers. CEOs should be thinking laterally on financing solutions, for instance, private investment in public entities (PIPEs) and asset swaps, and inclusively on consolidation opportunities that represent value as well as strategic sense."

Clearly, financing remains an issue for most organisations looking at consolidation. Jacques Callaghan, Managing Director, Hawkpoint Partners Ltd, offers this advice: "Those looking to exploit the market opportunities by acquiring in their core areas should think about partnering with private equity as the debt and public equity markets remain challenging."

What's interesting in the current climate, is that consolidation is increasingly viewed as a long-term strategy rather than a quick-win opportunity. Carlos explains: "Shareholders have now learned that M&A doesn't always deliver double-digit growth and I suspect their interest, and influence, in strategic M&A is going to decline in the near-term, leaving more activist boards and management teams with deeper integration and operational experience to find the right deals and make them work." Abbas adds to this that in the main deals "will be led by the difficult external environment that is forcing big corporations and boards to take another look at their long range plans." 

We have some great insight on Criticaleye for those of you considering or going through consolidation. Cheap At Half The Price...? The Challenge of Aquiring and Intergrating a Distressed Business, offers best practice advice for transforming your acquisition in a strategic and profitable asset. Also see the recent film and Write-up of a recent Criticaleye event Strategies for the Downturn: Effective M&A  including speeches from Accenture's Andy Tinlin, Vattenfall's Mikael Kramer and Google's Anil Hansjee.

I look forward to seeing you all soon. Please do get in touch with me if you would like to discuss any of the issues raised in today's newsletter.

Matthew Blagg, CEO, Criticaleye

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