Merger & Acquisition Deals in a Down Economy

While M&A activity has seen significant declines over the past few months, a few companies are positioned well to exploit low valuations due to the current market conditions. Companies with a lot of cash and a strong balance sheet should be well poised to jump on a good deal when they see it.

With the distressed financial sector, we have recently seen big M&A deals such as the Wells Fargo acquisition of Wachovia. With capital running out quickly and feeling intense pressure from federal regulators and investors, Wachovia was forced to sell itself rather than follow the path of someone like Citibank or Bear Strearns. This situation is not unique to Wachovia and we should expect to see more consolidation within the financial sector.

“Acquisitions and divestitures will remain an important consideration for market-leading companies as they navigate the current economy,” said Jeffery Weirens, a principal with Deloitte Consulting LLP. “One thing is certain, now is the time to be evaluating the organization’s overall portfolio and assessing the corresponding acquisition and divestiture strategy because the longer a company sits on the sidelines during the downturn, the further it will likely lag behind during the recovery.”

And while the current landscape will provide for many good acquisition targets because of cheap valuations, companies needing to raise capital may also be presented with opportunities to strategically divest of business segments that can unlock value for the firm.  The deals can definitely go both ways and can help those acquiring or divesting stabilize their balance sheets and maximize shareholder return over the long term.

While M&A activity may not reach levels of the past few years, acquisitions and divestitures may be just what our economy needs to improve efficiency and help businesses return to profitability. Corporate Finance directors should not let a good opportunity slip through the cracks even though the economy would suggest to sit tight and not do deals.