Acquire or be acquired in 2009, expert warns

Small and mid-sized listed companies need to continue to look for acquisitions despite the economic downturn, or risk become takeover targets themselves – that’s the message from Jon Dobell, managing partner of Ernst & Young’s strategic growth markets div

Small and mid-sized listed companies need to continue to look for acquisitions despite the economic downturn, or risk become takeover targets themselves – that’s the message from Jon Dobell, managing partner of Ernst & Young’s strategic growth markets division.

E&Y has just completed an analysis of the performance of small and mid cap companies (those ranked between 201 to 400 on the Australian Stock Exchange) and found that 33% of these companies completed an acquisition between January and October this year.

Dobell expects merger and acquisition activity will continue, despite difficult market conditions and the struggling economy.

“These companies know that if they are not looking at acquisition growth opportunities or organic growth opportunities, chances are someone is probably looking at them.”

Dobell argues there a number of reasons for small and mid cap companies to continue to drive growth through acquisitions, including shoring up revenue and increasing market capitalisation.

Boosting market value and making the jump from small or mid cap to large cap is particularly important for companies that want to escape investors’ general wariness towards smaller companies.

“Those that are playing in this 201 to 400 space have been extremely hardly done by in terms of their share prices falling regardless of their fundamentals,” Dobell argues.

Another reason for companies to continue to look for acquisition opportunities is the bargains that are on offer as competitors become weakened or large companies sell smaller divisions.

“These guys are seeing some very good companies come up from an acquisition point of view. Companies that are well position, with relatively low net debt and strong cashflow, expect to continue to look for acquisitions.”

Dobell even suggests cashed-up companies could look at “creative” takeover options, such as deferred settlements that would allow a company to complete an acquisition today and fund it from cashflow over an extended period.

If this option is available, banking finance is still an option.

“If the fundamental business basis are there, the banks will see that when they come through and look at debt funding. There is still good funds for good quality companies,” Dobell says.

And if you’re not planning any acquisitions, Dobell says it might be a good idea to think about what you would do if you received a takeover offer. Defend your company from being bought? Or try and get the best price and sell out?

“That’s something that those orgnaisations want to get their head around,” Dobell says.