Coatings World - December 2010

STRATEGIES & ANALYSIS
BY PHIL PHILLIPS, PHD
CONTRIBUTING EDITOR
PHILLIPS@CHEMARKCONSULTING.NET

Is there a best time to acquire or
divest a business?

A look at the
advantages
and pitfalls
of investing
during an
economic
downturn.

Most economists would say that North America and Europe remain in a quasi- downturn with mixed positive/negative
indicators. All, I believe, would agree there is a cred-
it crunch in both regions. If 20 executives from
the paint and coatings industry were asked
the following fundamental question, there
would be many varied answers. The question
is, “When is the best time to acquire or sell a
business? In a downturn phase or during an
upturn phase in the economy?”
There are three scenarios to consider in
either one of the two extreme phases
• Proactively seek acquisitions;

• Stay conservative and just get through this
phase; and
• Sell off non-core or near-core businesses.

Considering a downturn economic environ-
ment some executives would look for opportu-
nities to extract asset bargains that will
assist them in growing and creating future
value for their stakeholders.
It is the opinion of some experts that “stay-
ing conservative and just getting through this
phase” (a downturn) is absolutely the wrong
strategy. In other words, provided a company
has the resources to acquire, they should do so
in a downturn without question.
Despite the old adage often mouthed by
executives in all industries, “Invest in a down-
turn,” very few put their money where their
mouths are. They generally become conserva-
tive in downturns, cutting costs, headcount
and other so-called “quick-fixes.”
After considerable research of 200 global
companies and in their book, The Granularity
of Growth, Baghai, Smit & Viguerie observed
two sets of results were obvious.

First, of the potential strategic moves compa-
nies can take to grow in a downturn—divest,
acquire, invest to gain share—an effective
acquisition strategy (defined as growth through

M&A at a rate higher than that of 75 percent of
a company’s peers) created significant value for
shareholders during an upturn, on the other
hand, divestments created slightly more value
than acquisitions did.
Second, companies often behave in counter-
productive ways. Fewer than half as many
companies in the segments studied made
acquisitions in downturns rather than in peri-
ods of economic growth. Significantly more
divested businesses in those market segments
in downturns than in upturns.
What is ironic but very natural, are execu-
tives, in downturns act like human beings
normally do. They want to protect what they
are responsible for, which is their business
environment. In downturns, as revenues slow
putting pressure on fixed cost spreads and
margins, management switches its center of
attention to reducing costs to maintain earn-
ings protection.
This tactic, while a normal “knee-jerk” reac-
tion, is aimed at protecting the balance sheet,
which leads to the deferral of growth and low-
priority investments, the shelving of large
acquisitions and sale of assets. As Baghai,
Smit & Viguerie observed, many companies
simply freeze. Sixty percent made no portfolio
moves at all in downturns. Forty percent made
no moves in upturns.
The best growth companies take a very differ-
ent approach. They view a downturn as a time
to increase their leads in market share and
value enhancements and make acquisitions.
They aggressively seek out and with great zeal,
concentrate on the assets they strategically
need to grow rapidly and certainly, with much
greater speed than competition. Henkel’s very
quick acquisition of the National Starch busi-
ness from AkzoNobel in 2008 is an outstanding
example of a strategic acquisition in a downturn
economy. CW

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