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The good, the bad and the ugly - a guide to M&A in distressed times

Tuesday, 28 July, 2009

Contrary to short-term market expectations, acquiring organisations of distressed targets often struggle to realise long-term value in the form of increased return on equity, according to new research from the M&A Research Centre (MARC) at Cass Business School*. The study, one of the largest of its kind, analysed 12,000 deals over 25 years and concludes that for distressed acquisitions post-merger integration is a key factor for success.

While acquirers of distressed and insolvent targets in the US can enjoy positive share returns on the day of announcement, there is noticeable scepticism in the UK of the value of acquiring distressed assets. The study also finds that if the target is insolvent and the deal is announced just after a major crisis, both the acquirer and the target enjoy positive short-term returns.

Professor Moeller said: In the current environment distressed acquisitions are common. With a high level of uncertainty in the markets and with volatile stock prices it is very hard to understand whether now is a good time to purchase a distressed company or for struggling companies to seek stronger partners. With this research we have studied acquisitions of distressed and insolvent targets as well as the M&A activity and economic cycles to draw a clearer picture of the M&A environment today. 

The research also reveals that the telecommunications and retail sectors have been particularly active acquirers of distressed targets in 2008 with more buyers than available distressed companies. This implies that they are acquiring targets from outside their industry, that is, they are net acquirers of distressed targets. Over a longer period of time, net distressed acquirers include healthcare, materials and media industries. In 2008, the real estate and media industries actually had larger numbers of distressed targets than acquirers.

The MARC team, led by Professor Scott Moeller, conducted this comprehensive study in collaboration with Allen & Overy, Credit Suisse, Deloitte and FT/Mergermarket.

MARC is the new Mergers and Acquisitions Research Centre at Cass and is the first such centre at a major business school to pursue leading-edge research into the global mergers and acquisitions industry. Blending the expertise of M&A bankers, lawyers, consultants, accountants and other key market participants with the academic excellence of Cass, MARC provides fresh insights into the world of dealmaking.

*The Good, the Bad and the Ugly: A Guide to M&A in Distressed Times. Dr Maria Carapeto, Professor Scott Moeller and Anna Faelten, Cass Business School, London, May 2008.

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