The first half of 2020 has shown historic upheaval in the world economy. International trade, manufacturing, retail, and services have been dramatically curtailed, or even stopped, throughout the world due to the coronavirus pandemic.
History suggests this market upheaval might create the conditions for business acquisitions. Rather than keeping a low profile and riding out an economic downturn, proactive businesses often look for opportunities to consolidate market power by acquiring their weaker competitors. This process is to be encouraged since an acquisition is often the best way to realize efficiencies of scale, reduce waste, preserve jobs, and monetise the value of a struggling firm.
What are Business Acquisitions?
A business acquisition occurs when a target business is absorbed into an acquiring business and the target business ceases to exist. Generally speaking, the acquiring business retains its structure and management after the acquisition.
The definition of an acquisition contrasts with that of a merger, in which both companies cease to exist and a new, joint company is created. In a merger, the new company often incorporates elements of each merger partner into its structure and management.
Conditions for Acquisitions
Acquisitions clean up an industry by eliminating excess supply and less stable firms. This allows acquiring firms, as well as surviving competitors, to access a more sound market.
We can expect acquisitions in 2020 as the coronavirus pandemic and its resulting recession creates the following market conditions:
- Crashing stock market: As share prices drop, some firms become undercapitalized and unable to pay ongoing expenses. These firms make themselves willing targets for acquisition so they can pay off creditors.
- Ballooning debt: A drop in revenue prevents firms from servicing their debt. Acquiring firms often take on the debt of target firms during acquisitions.
- Increasing bankruptcies: Many acquisitions take place during bankruptcy proceedings as target companies sell off assets to repay creditors.
Reasons for Acquisitions
When these conditions exist, comparatively healthy companies will look to acquire struggling companies. The acquiring business may have several motivations for pursuing an acquisition:
- Eliminate a competitor
- Acquire rights to new brands and technology
- Diversify product lines
- Reduce costs
- Gain access to new markets
- Obtain physical assets like factories and equipment
Friendly vs Hostile Acquisitions
The primary difference between a friendly and hostile acquisition is whether the acquiring firm reached out to the target firm and obtained its management’s approval for the acquisition. If the acquiring company negotiated a buyout price with the target company, the acquisition is considered ‘friendly’. However, if the acquiring company circumvents the target’s management and makes the offer directly to its shareholders, the acquisition is considered ’hostile’.
In either case, an acquisition takes place after the shareholders approve the offer, or if the target is in bankruptcy, after a bankruptcy court approves the offer.
Case Study: Business Acquisitions During the Great Recession
The US economy has not experienced a recession since 2008’s Great Recession. Other major recessions or depressions include the Great Depression which began in 1929 and the Depression of 1920 which overlapped partially with the 1918 influenza pandemic.
As demonstrated below, these recessions were characterized by increased merger and acquisition activity in their early stages as companies sought to cash out or join forces to weather the economic downturn.
Financial Services
The most notable acquisitions from the Great Recession were financial institutions that had overextended themselves with financial products that relied on subprime mortgages for their value. As the housing market crashed, so did the value of these derivatives, causing balance sheets at Bear Stearns, Merrill Lynch, and Lehman Brothers to turn negative. As a result, these firms were acquired:
- Bank of America acquired Merrill Lynch
- Barclays acquired most of Lehman Brothers after it declared bankruptcy
- JPMorgan Chase acquired Bear Stearns
Beverages
The wave of acquisitions was not limited to financial institutions. One case study involves InBev and a series of moves that began in 2008 before the Great Recession and continued into 2009.
In mid-2008, InBev, based in Belgium, acquired Anheuser-Busch, based in the U.S., in an all-cash deal valued at $52 billion. Shareholders were bought out at $70 per share, and Anheuser-Busch ceased to exist. In exchange, InBev, which owned several European breweries and brands such as Beck’s and Sella Artois, obtained 29 breweries and brands from Anheuser-Busch including Budweiser, Bud Light, and Michelob.
InBev had no interest in retaining the ten entertainment venues, including three SeaWorld and two Bush Garden theme parks, also acquired in the deal. In 2009, at the height of the Great Recession, InBev sold the theme park division acquired from Anheuser-Busch to The Blackstone Group, whose portfolio already included Legoland theme parks and Madame Tussaud’s wax museums, for $2.9 billion.
Thus, like a multi-billion dollar game of monopoly to dominate a market, InBev became the largest brewer in the world, and The Blackstone Group became the second-largest theme park operator in the U.S.
Business Acquisitions in 2020
Several industries will struggle through the coronavirus pandemic and the government-ordered shutdowns. Restaurants, entertainment and travel are suffering greatly and may look to acquisitions to survive the downturn. However, history also shows that, like the Anheuser-Busch deal, acquisitions can come from any corner of the economy during volatile economic times. Businesses and investors should be aware of any company that may decide to acquire, or be acquired due to undercapitalization, lost revenue and rising debt.
