5 minute read 28 Apr 2020
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Why pursuing M&A in uncertain times can create long-term value

By Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.

5 minute read 28 Apr 2020

Evidence shows that companies that made a significant merger or acquisition during an economic downturn outperformed those that do not.

Most companies are still in the early days of assessing the impact from the COVID-19 crisis on their business. But as they begin planning for how the landscape will look as the crisis plays out, there may be opportunities to make one or more long-sought acquisitions.

Businesses are, or should be, examining their existing lists of potential acquisition targets and should be prepared to act, as deal premiums are likely to come down and assets that companies had been reluctant to sell may become available.

But the window for maximizing value could be relatively short, if history is any indication.

Learning from the global financial crisis

Evidence from the global financial crisis (GFC) from late 2007 through early 2009 shows that companies that made significant acquisitions during an economic downturn outperformed those that did not.

There are some caveats. The GFC was, as its name indicates, a financial crisis. Governments needed to bail out banks as many companies were overextended. Consumers were crunched as the value of their homes dropped dramatically and some found their mortgages underwater. Also, the GFC did not shut down huge swaths of the economy the way COVID-19 has; rather, it was somewhat limited to the financial services and real estate sectors.

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Today, we have almost the entire services sector of the economy immobilized and unemployment at a much higher level. The COVID-19 crisis is first and foremost a health crisis and the progress of the disease is likely to be the key factor in determining the length of the downturn and, thus, the optimal M&A window. On the plus side, there are also more sources of funding for companies than just government support programs, including private equity and sovereign wealth funds that have ample cash to invest.

Still, the GFC is the best modern example we have to examine the ultimate shape of the eventual recovery from an M&A perspective.

With regard to dealmaking, the recovery beginning in 2009 was very much U-shaped. That is, it took more than five years for deal volume to recover to average pre-crisis levels and deal value never quite recovered.

Global M&A deal activity since 2000 showing GFC market dip

The story regarding deal multiples, defined as enterprise value (EV) divided by EBITDA, was somewhat different, with much more of a V-shaped recovery. Deal values plummeted from an average of 10.8x in the three years before the 2008 crisis hit to as low as 6.5x in 2009, before rebounding to the 10-year average of 11.6x by 2019.

EV-EBITDA multiples since 2000 showing GFC decline

This data supports the idea that there will be a relatively short M&A window that opens as the COVID-19 crisis ends, during which bargains will be had by those with the liquidity and the risk tolerance to move quickly, and who have done their homework in advance.

Active acquirers may outperform

There are some qualifiers to consider when examining the data.

First, there can never be a true control in the M&A world to measure against because a company either does a deal, or it does not. Additionally, company performance as measured by total shareholder return (TSR) is the result of a mix of inorganic and organic activities, as well as any number of external factors, none of which can be totally isolated.

That said, we nevertheless can conclude the following:

  • Those companies that made acquisitions totaling at least 10% of their market cap from 2008 through 2010 (active acquirers) had an average TSR of 6.4% from January 2007 through January 2008, compared with TSR of -3.4% for less active companies. A similar difference was seen in median TSR.
  • The trend continued over the period from January 2007 through January 2010, when average TSR was 10.5% for active acquirers, vs. 3.3% for less active companies.
Total shareholder return (TSR) by acquirer type

1) Evaluated Fortune 1000 companies as per 2008 rank (excluding financial services and real estate sector and companies where the share price was unavailable on 1 January 2007 and on 1 January 2012).

2) TSR calculated from 1 Jan 2007/market cap averaged for 1 January 2008 and 31 December 2010.

3) Change in TSR measured company’s performance with exclusion to the sector-specific index performance.

The findings are based on our analysis of Fortune 1000 companies across most sectors, excluding the financial services and real estate sectors, with deals announced or closed from January 2008 through December 2010.

TSR for active acquirers with strong liquidity positions (cash and short-term investments to revenue of at least 7.0% in 2007) increased by an average of 5.0%. In contrast, other companies saw an average increase of 1.7% over the period from January 2007 through January 2010. This gap continues in the long term (five years) with active acquirers’ TSR growing at an average of 16.9% vs. 4.9% for other companies.

Deal activity may be the best option for excess liquidity

Companies with excess liquidity may find that shareholders and boards are more conservative about how this liquidity is used. Specifically, share buybacks, and possibly dividend payments, may be curtailed for several years and companies will need to keep a higher level of cash on hand. These factors will require them to use any truly excess cash to generate long-term shareholder value.

At the same time, with a focus on preserving the health of the economy and jobs, governments and regulators are likely to be much more tolerant of larger acquisitions in many industries.

Special thanks to EY team members Rahul Agrawal, Manvi Gupta, Banipreet Kaur and Vaishali Madaan for their contributions to this article.


Our analysis suggests it is not too soon to consider M&A opportunities and to be ready to act. CEOs, CFOs and heads of strategy and corporate development need to think strategically now about the “new normal” and which acquisitions would be accretive to their current business models. This requires significant rigor about understanding post-COVID-19 recovery curve scenarios that target companies are likely to experience coming out of the crisis, in addition to understanding the true liquidity situation of the target and any of the target’s near-term capex or similar needs.

About this article

By Brian Salsberg

EY Global Buy and Integrate Leader

Passionate acquisition and merger integration leader and aficionado of all things deal-related. Global citizen. World traveler. Husband. Father of two.