World Grain - June 2009 - 6

from the editor-in-chief

Missing out on
acquisition opportunities

tating that the current dismal economy
and the near-term uncertain business
outlook explain why merger and acquisition activity in the global grain and
grain food industry has been minimal of late
would probably meet with little disagreement from executives. But asserting on the
basis of this conclusion that the absence of
acquisition activity is wrong-headed, that
there is no better time to look for growth
through acquisitions than during a business
downturn like this might prompt strong challenges. Yet, many business economists and
historians contend that hesitant executives in
the grain industry, as well as in other industries that have managed to do relatively well
in these difficult times, are not just missing
out on great opportunities, but are doing a
costly disservice to their owners. They cite
"Invest in a downturn" as a maxim that has
especially powerful resonance in an economy as sour as the current one.
Nay-sayers about risking scarce cash and
other resources to make acquisitions at the
present time point to several reasons for their
caution about taking on even relatively small
acquisitions, much less the mega-mergers
that were commonplace a few years ago.
Difficulties in securing capital, through conventional loans or by the sale of bonds or
equity, stand at the top of any negative list
that might be cited. Ranked almost of equal
importance as a bar to acquisitions is the de-

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sire to preserve balance sheets, especially the
cash positions that seem such an essential asset at a time when outside sources of capital
are reluctant to provide funding, for acquisitions and also for normal operations.
Research by McKinsey & Company, the
management consulting firm, underscores
the advantages of acquisitions coincident
with a severe business downturn. It points
out that in 75% of the companies it has studied, growth through acquisitions undertaken
in tough times created significant value for
the company's shareholders. In examining
corporate actions that could be taken during a time of business prosperity, the same
study indicates the most to be gained is from
divesting. Yet, even with these findings,
McKinsey's research shows that significantly more companies divest during business
downturns and make acquisitions during an
upturn than would be judged sensible in light
of historical returns.
The major reason for what seems to be
this totally counterproductive performance
is the pressure on management during downturns to focus on ways of reducing costs and
maintaining earnings. Ambitious acquisition
plans are often deferred or canceled in response to a period like the present one. Yet,
as McKinsey concludes, the best and fastest
growing companies pursue the course of not
just proceeding with acquisition plans but
of launching an aggressive effort to expand

in such a period. Of course, the study does
not advise unrestrained spending in pursuit
of acquisition opportunities. Indeed, acquisitions that contribute to reduced costs might
be encouraged to take precedence over steps
that are aimed solely at expanding revenues.
Favoring acquisitions that cut costs has
not yet emerged as a dominant influence
in the grain industry, even in theoretical
discussions of possible synergies. This is
so even though reducing costs in doing a
merger is much more easily analyzed and
projected than are revenue and earnings
gains. Building scale in order to slash costs
might well become the new paradigm in the
way mergers and acquisitions are considered in the industry. Research by McKinsey
indicates that mergers undertaken in order
to achieve cost savings are more likely to
realize their goals than are targeted revenue-building synergies. Also favoring this
approach is the likelihood that bankers will
be more willing in the present environment
to supply funding for acquisitions targeted
at reducing costs than aimed at building
revenues and earnings. This is especially
the case in light of the cost savings that may
assure profit gains at a time when purchase
prices reflect the weight of an economy still
threatened by severe recession.

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WORLD GRAIN (ISSN 0745-8991) Volume 27, issue 6,
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Editor-in-chief

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World Grain - June 2009

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