Economic uncertainty may be a prime time to consider acquisitions for companies in various industries.
Making purchases in uncertain times can be a great opportunity to gain market share and grow your company. As reported in the recent news, the legendary investor, Warren Buffett is actively seeking
European acquisitions due to the abundant buying opportunities of private companies at bargain prices.
Recent reports show that the average sales price-to-earnings ratio (P/E) for S & P 500 public companies is slightly more than 13 times earnings. The average private middle-market companies with revenues that range from $10 million to $100 million have equivalent P/E that range from 4 to 8. It makes sense that the
Oracle of Omaha is on a shopping spree for private companies now.
Many chief executive officers and directors think defensively in an economic downturn. In some industries, this point of view could be a major mistake for the long term health of the company. Strategically, this could be a great time to improve your company's financial well being and improve your business's market share for a number of reasons:
1. A healthy, profitable business may be experiencing low cash flow and be interested in joint venture or outright sale of the company to alleviate their problem. (One clue is a detailed analysis of their inventory and accounts payables which may show that the target company's bottom line could be much stronger due to the purchasing power of a larger company).
2. Companies that need minor changes in capital structure or reorganization could be great turnaround opportunities now. Financially stronger companies have advantages in obtaining cheaper debt or equity capital due to more stable balance sheets, and cash-to-debt ratios and liquidity measures are more stable.
3. Corporations may also see the opportunity to combine with strategically similar businesses for instance, a large supplier or customer to prepare for the next economic boom cycle.
4. Foreign wealth funds are currently looking for companies in cross-border mergers and acquisitions to have increase their U.S. market presence. Also, the U.S. dollar's decline compared to other major currencies (i.e. Euro, British pound, and yen) is creating buying opportunities for various foreign strategic and individual buyers.
Economic uncertainty can be a silver lining for long-term strategic decisions. Uncertainty can be your best opportunity to grow your company especially with competitor's who may be reeling from poor decisions they made in the past boom cycle. Well-run companies currently are taking action now with acquisitions, and, in some cases, are creatively selling segments of their business thereby repositioning and strengthening their companies' financial health for long-term growth.
Scott T. Wait is a managing director of the Reno office of The McLean Group LLC. Contact him at 825-7337 or swait@mcleanllc. Brian Sullivan, managing director of the Silicon Valley office of McLean Group LLC also contributed to the article and can be contacted at bsullivan@mcleanllc.
