Question

In times of economic downturn, how can M&A be used as an enabling tool for recovery from recession?

I need 350 words

Answer 1

Economic Downturn is the situation where prices of stocks, commodities, property fall. Productivity grows very slowly as it was earlier, GDP shrinks or expands more slowly.

M&A are the tools which enables the companies going into recessions to recover from it. Although the downturn does not impact all the companies or sectors equally, it can have more impact on some of the sectors but have less on the other. We can take example of 2008 Global Financial crisis, as it was a financial crisis, financial institutions, real estate and housing market, banks were in deep trouble, it has also affected other sectors but not as much as financial sectors.

• M&A are considered as one of the strategic expansion and development during tough times. It helps the merged entity to penetrate into new markets which brings new businesses to the entity and helps in tough times to recover from financial crisis.
• M&A have the ability to create more value for the shareholder's during a downturn than in favourable economic environment.
• Acquisitions during recessions with lower multiples and weak earnings, allows firms to manage effectively their asset restructuring which helps them cutting costs and generating higher returns and also helps the firms to recover from the crisis.
• During a downturn stock prices of companies falls which widens the gap between intrinsic value of the company and the market price of shares, hence it makes easier for the companies to reject low offers and expect for higher premiums.
• Most researchs on this topic says that, if you enter into an M&A during smooth economy there may be superior returns that you will get, but during the downturn you will find the opportunities grow even big and also to overlap buyers and sellers expectations.
• Acquisitions during a downturns tended to bring their cashflow return on investment more than three-times as much as those of their counterparts, hence it helps firms to recover from these crisis.
• Company having cash & profitability during downturn opens ways to close deals as most of the corporates are not able to raise money to finance their deals.
• Apart from these, after successful M&A the change in the management also helps the company to succeed in acheiving their mission and vision.

Hence, M&A is an enabling tool for companies to recover from the economic downturn.