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Apr 21

M&A opportunities in an economic downturn

Posted by: George Mulhern        

I am fortunate to sit on the Advisory Board for McKinsey & Co.’s high tech practice. It is a wonderful learning opportunity —  getting  exposure to what they, and their clients, think is strategically important.   I only hope that my experiences at  HP, and now with Highway 12 Ventures, will enable me to contribute back to McKinsey, even a fraction of what I learn from them.

So, what kind of strategic advice are big players in the tech industry getting during this economic downturn?   Everyone wants to survive when a major downturn hits, but some  companies are able to find ways to emerge even stronger.   I read an interesting paper today from McKinsey & Co. that sheds some light on this.

McKinsey analyzed the performance of 700 companies during market contractions over the past 20 years and found that there were significant shifts in market leadership through those downturns.   Leaders became laggards and laggards became leaders.  About half of the companies that entered the downturn as market leaders ended up as laggards when the economy turned around.  Those companies that continued to be, or that became leaders implemented a number of actions.  One of which, is very relevant to entrepreneurs.

During the last major downturn for high tech (2000-2002), the companies that emerged as leaders made significant acquisitions that strengthened their product/service portfolio and market position.   The leaders made more, and more substantial, acquisitions than those companies that exited the downturn as laggards - they were 30% more likely to make acquisitions and racked up 26% more deals.  The leaders also tended to wait until later in the downturn, when valuations of their targets were most attractive.

There are a lot of tech companies sitting on a pile of cash.   They are compiling their shopping list and looking for ways to emerge from this recession as leaders.     Get ready.  I think in the next six to twelve months we could see M&A activity really start to pick up.  What do you think?

Of course, as a matter of full disclosure, my timing hasn’t always been perfect. If it was, I would have sold all my HP stock when it was at $144 a share.  But what the heck, it is back over $30 now.


3 Responses to “M&A opportunities in an economic downturn”

  1. avatar MattCope says:


    Thanks for sharing some insights from the McKinsey paper.

    It is axiomatic that corrections create opportunities for acquisitions, but that securing financing during those periods is the tricky part.

    I'm inferring that those companies that emerge as leaders are close to the front of the pack at the outset of the correction - otherwise, they would have a difficult time financing acquisitions, right?

    I think you're right - M&A could start to pick up if we don't get any more serious shocks. But for entrepreneurs who don't run companies with deep balance sheets or access to external financing, I would think the only benefit of increased M&A volumes would be more exit opportunities.

    In what other ways does more M&A benefit entrepreneurs? And, more generally, how can less established players benefit from corrections like this? I would think that, by the time newer players can access financing, all the best deals would be picked over…

    Thanks again for the insight - good food for thought.

    • George Mulhern says:

      Matt, thanks for your comment. I agree. Though not exclusively, this is probably a strategy that is more easily implemented by leaders — that wind up staying leaders. And, as you said, the primary benefit to the entrepreneur is more potential suitors in the hunt. A case in point would be Cisco. During the 2000-2002 downturn, they acquired 16 companies. McKinsey & Co. identified a number of other actions that market laggards, or less established players took to emerge as leaders. I will try to pull some of those together for a future blog.

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