Strategy in Action - the Return of External Growth

The FT has a special feature this week on “Deals and Dealmakers”, focusing on the prospects for merger and acquisition activity in the global economy. It is pretty heavy stuff in places, but there are some very useful snippets in there for business teachers and students. I have picked out a few to consider.

We now appear to be entering a period of increasing M&A activity. For many firms, external growth through acquisition or merger is now firmly back on the agenda, whereas during the global recession such activity was less popular.

A comment in one of the FT articles makes that point well:

“Having spent the past two years cutting costs and repairing their balance sheets, chief executives are now seeking growth through M&A.”

Emerging markets such as Brazil, China and India seem to be leading the M&A market - both as a source of potential acquistions (e.g. the target businesses are located in emerging markets) and also as investors.

For the UK, the weakness of the pound (sterling) – which has fallen almost 20 per cent against the dollar and the euro over the past two years – could encourage acquisitive companies to look to the UK to expand their businesses. Kraft’s acquisition of Cadbury was certainly helped by the fall in the value of the pound against the dollar.

However, there are two key reasons why firs may find it harder to complete their desired takeovers.

Firstly, it is still difficult to get bank finance - even for the largest deals. Banks continue to recapitalise and recover, and view takeovers as particulalrly risky transactions.

Secondly, shareholders too are less prepared to allow their management to pursue external growth without greater scrutiny of the strategic rationale for the deal. Shareholders know that acquisitions are difficult to make work and often end-up destroying value. So the pressure will be on management to articulate a clear, compelling rationale for a transaction and to convince shareholders that the price being paid is sensible.