Eye on the Recession: A Spate of Mergers & Acquisitions
Posted by Menachem Lubinsky on May 3, 2010 under Recession | 
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In the past few days, there seemed to be a significant surge in the number of high-profile mergers and acquisitions, raising the question of how much of an effect the recession had on these developments. To be sure, M & A’s occur during more stable economic periods as well, but a closer look suggests that the current economic climate is having a direct effect on the mergers and acquisitions now in the news.
The on-again off-again proposed merger between Continental and United, two of America’s largest airline carriers, may be a good example of a recession related deal. Surging fuel prices, a decline in business travel and mounting debt forced Continental to look for a way to stabilize the company. On the other hand, the acquisition of Palm by Hewlett-Packard probably would have occurred in a more stable economic climate as well. Palm had simply lost its competitive edge to a new generation of smart phones, namely Blackberry.
While most of us focus on the “big-name” mergers and acquisitions, economists say that they have increased dramatically amongst mid-sized and even smaller firms during the past few months. Typically a merger affords both companies the opportunity to create a new entity that is more efficient, cost-effective and ultimately profitable. The same is true for an acquisition when a floundering company is acquired by a healthier entity.
There is most definitely a connection between some of the mergers taking place nowadays and the recession. In 2008, after the housing crash and the collapse of many of the nation’s largest financial institutions, there was no discussion of mergers for such icons as Lehman. It was simply curtains for those companies. For the banks that failed, the FDIC made sure that they were taken over by other banks.
The story is quite different for businesses that managed to stay afloat during the recession, albeit in a weakened state. Many accumulated debt in the belief that the turnaround was just around the corner. They were betting that the recession would be short-lived and that they would soon revert back to profitability. But that did not happen and worse, some economists were predicting permanent changes in consumer habits that all but sealed the fate of many troubled businesses.
I recently tried to convince two food importers that it would be in their best interest to merge. One business was fairly successful with a staff of a half dozen people but was not growing. The other was a husband and wife team working out of their basement that found it hard to keep up with their business. While the husband traveled to secure new products, the wife managed the home front. The couple felt that it was time to move out of the basement and consider renting space and hiring a clerical person.
Upon closer examination, it seemed that both companies were not only importing some of the same lines; they pitched the same accounts. But here’s where egos got in the way. The couple could not fathom an arrangement where they would give up their independence. The other company was convinced that the couple would simply “steal” their accounts and then go on their own again.
It is some of these human aspects of companies that often prevent mergers that make sense from happening. This is true in even the large mergers when two well-paid CEO’s with huge egos bud heads in negotiations for a merger. Even the question of who ultimately becomes the CEO of the merged company can become the impediment to a deal. Sometimes it becomes a focal point in the negotiations, especially when a Board of Directors feels that the acquired company has the better CEO. In the Continental-United deal, the new entity will go under the United name but the Continental CEO will preside over the newly merged company.
Tapping into some of the best personnel in each of the merging companies is one of the major advantages of a merger. Many merged companies not only capitalized on the large pool of talent that often comes along with a merger, they actually found the right team to take them on the road to profitability and beyond.
The recession forced many companies to look at their long-term prospects of success. While many believe that they could weather the storm on their own, others began looking for strategic partners to help them devise long-term solutions. This may seem like a process that needs to take place periodically in the life of a business, but it is far more urgent in a recession since the prospects of raising capital are not that clear. What is clear is that signs of recovery not withstanding, there is a growing trend towards mergers and acquisitions and that many are directly related to the recession.
