M&A Blog Follow-Up
All of the economic signals we see in the market today support the idea that demand growth is slow and is slowing globally. China appears to be at a standstill, despite recent stimulus moves and slowly companies are realizing that there is no quick fix, not for Europe, not for Asia and not for the US. In the last few days both Honeywell and 3M have echoed the statements that we have made in recent research; that slow growth and ambitious growth targets, coupled with decent free cash flows and low cost borrowing are likely to drive deals.
In research that we published last month, we looked at the likelihood of making money by owning the acquirer in this environment and concluded that it was low. While there are sectors that have shown quite robust post acquisition performance – see chart, we are concerned that sellers are not willing and that they are only negotiating for cash. This comes at a time when multiples are high. Consequently, buyers chasing growth through acquisition are setting themselves very high cost reduction and revenue synergy targets in order to justify the transactions.
We continue to advocate buying a basket of companies that look like targets rather than acquirers and this really requires a good understanding of management teams and their motivations. Look for companies with significant change of control contracts for CEO’s or management teams and look for companies where management owns a lot of stock or stock options.