London’s Cass Business School recently released a research which highlights the perils facing executives tempted to use the financial crisis to buy struggling rivals, or distressed companies, at apparently bargain prices. The study looked at almost 3,000 acquisitions of distressed or insolvent companies, across various industries, over the past quarter century, from 1984 to 2008. It found acquirers who bought distressed or insolvent companies suffered a lower or deteriorating return on equity (ROE) in the three years after the deal, and the buyers underperformed those who bought healthy firms. The other aspect which the research found was that these deals involving distressed or insolvent companies tends to complete significantly faster, hence putting extra pressure on management teams. The ill-fated acquisitions of imperilled banks Merrill Lynch and HBOS by Bank of America (BAC.N) and Lloyds (LLOY.L), are recent high-profile examples.
As highlighted in my earlier post, M&A drivers could be for expanding customer base, market share, top line growth, new market entry, or to eliminate a competitor. There are also two other reasons that drives M&A, which are to build competence as well as to make a significant changes to the business model. Examples of these are like Scandent, Intelenet (a joint venture of HDFC and Barclays), and Wipro (who acquired Spectramind, Nerve Wire and Quantech to augment their competency).
