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News | The End of the Acquisition Bust

May 2003

Over 4 years ago, I used one of these letters to predict the end of the acquisition boom of the 1990's. Unfortunately, I was right.

Now for some good news. I believe the worst is over. 2003 will be a little better than 2002 and the first year of a recovery. Boom times won't return soon, but things will start improving. The recovery will be driven by:

  • Record low interest rates and a gradual easing of credit standards.
  • Prices that are low enough to attract even conservative buyers.
  • Grudging acceptance by sellers that, as low as prices may seem, they aren't likely to get much higher soon.
  • Pressure on private equity groups by limited partners to deploy more than $100 billion (yes, billion) of uninvested capital.

Despite this analysis, the prevailing view is still neither to acquire at a time of economic uncertainty nor to sell at one of depressed prices. I think both views are short-sighted.

For a buyer, the greatest opportunities come by recognizing and taking advantage of inflection points, those times when a trend cannot be sustained and sharply changes course. Unless the U.S. and world economies are terminal cases, this will happen with respect to economic growth. By the time it is recognized that it has, limited competition for acquisitions and depressed prices will be a thing of the past. Meanwhile, astute buyers will enjoy historic opportunities. The best opportunities will be strategic acquisitions, those made to accomplish strategic business objectives and to which the buyer brings sufficient synergies to make them worth more than they are to the seller.

For many sellers, the decision to sell is not discretionary but imposed by conditions beyond their control. Deferring a sale because of unattractive prices is not an option. The issue is not whether to sell under adverse circumstances but how to make the best of adverse circumstances.

Sale to a strategic buyer will help. For a well chosen strategic buyer, the acquisition will be not just attractive but imperative. The seller's business will be not one of many possible deals but one of only a few ways to achieve a strategic objective, perhaps the only one. The costs of not making the acquisition will be considerable.

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