M&A Will Be Back, Eventually Bigger Than Ever

Because they play an integral role in market evolution, mergers and acquisitions will recover and eventually surpass previous record levels of transactions in recent years, said Jim Lawson, '81, co-chairman and managing director of Lincoln International. "There is always a reason for M&A, given the natural development of markets," Lawson said at the Investment Banking Symposium, sponsored by the student-led Chicago Booth Banking Club, at Gleacher Center on July 18.

Despite a significant drop in the total number of global M&A transactions from the 2006 and 2007 levels of more than 20,000 to a run rate of around 10,000 for 2009, the volume of M&A transactions will recover and reach new heights because M&A is an important part of each stage of the development of industries, he said. Furthermore, this return will be enhanced by the increasing use of M&A by developing countries such as China and India, Lawson said.

Among the stages of development in which M& A plays a natural role, he said, are:

• Market development. As a product or service is introduced, many of its early adaptors are bought by new entrants seeking an immediate foothold.
• Growth of a market. As smaller companies grow, larger companies that want critical mass before entering a market buy more established competitors.
• Market penetration. After an industry is fully penetrated, competitors buy each other to gain market share.
• Decline of a market. As an industry declines, competitors continue to buy each other in order to rationalize the industry and their cost structures.
• Two other key factors propelling M&A are the dynamics and demands on the owners of businesses, Lawson said. "With businesses owned by individuals, they sell because of events in their personal lives," he said. "With public companies, new CEOs are a great source of business for us. They may have a new strategy where it’s out with the old and in with the new. As they grow and change their company, often they divest smaller or slower-growth businesses.  With private equity, they are mostly 10-year funds that have promised their investors cash liquidity within a relative short period of time.  They sell businesses to fulfill that liquidity commitment."

M&A in Chapter 11 is conducted through the use of Section 363, a section of federal bankruptcy law that allows the selling of non-core assets during the bankruptcy process, said Barry Freeman, '03, managing director of Lazard Middle Market.

"You’re effectively running an auction in the full public view with full public disclosure that these assets are going to be sold as a way to reshape the business as part of a plan of reorganization, or to generate financing to help operate the business through that bankruptcy process,” Freeman said. “It’s essentially a super-condensed M&A sale process that is done under the auspices of the bankruptcy court." Charles Weikel, '87, director of M&A for the Kinsella Group, spoke on projected increases in Chinese investment in M&A in the U.S.

— Phil Rockrohr