With economic downturns come some pluses. Corporations with strong balance sheets are at an advantage in terms of being able to pursue strategic acquisitions. The second half of 2008 and 2009 will be marked as the return of strategic buying. Pepsi Co's and Heinz's CEOs are becoming increasingly vocal about opportunities they see.
Private equity(PE) firms drove the deal flow over the past two plus years. With the credit crunch, PE deals are sidelined. This marks a shift from financial opportunities to strategic based transactions.
Corporate buyers are looking at smaller dealers; chasing companies worth less than $1billion, for a EBITDA multiple of 11.1 times. This is down from the average multiple of 11.4 times in 2007.
Historically, according to the Boston Consulting Group report last month, of deals completed since 1981, acquisitions made during downturns were twice as likely to produce returns of more than 50%. Deals completed during periods of stress produced an 8.3% total shareholder return on average, after two years versus a -6.2% return after two years for deals done during upswing years, according to Alexander Roos of Boston Consulting. This difference of 14.5% can mostly be explained by purchase price paid. It seems Warren Buffett has the right idea - "buy low, hold and only sell high". This explains Buffet's interest in the bond insurers earlier this year.
According to Andy Schmidt the target area is bolt-on private companies, because smaller companies dovetail nicely with where we're focused. In addition he noted that the environment is much better and continues to get better than just a year ago.
So if you have a successful private company be prepared for the coming knock on your door. It my behoove you to target the coming knock.