Dissecting Deals of Necessity

If necessity is the mother invention, it might also be considered the mother of M&A in today’s wallowing market. Whether it’s a distressed acquisition out of a bankruptcy auction or a cost-cutting merger that eliminates capacity in a given sector, deals of necessity seem to be the only game in town.

The question I have, though, is whether or not these deals will work. The whole idea that two companies have to merge to survive evokes the old cliché about tying two rocks together to make them float. If a merger fails to address the fundamental issues facing two companies, then it’s unlikely a deal will save the combined business. The merger between XM and Sirius, for instance, doesn’t change the fact that they’re competing against a free product, terrestrial radio.

At the same time, it’s often the case that there are few other options available. Perhaps that’s why so much speculation went into the possibility of a General Motors and Chrysler tie up or why the government force-fed Merrill Lynch to Bank of America.

Considering that deals of necessity are driving the M&A market, I’m curious what distinguishes those that work – such as Wilbur Ross’s steel rollup – and those that don’t. From what I can tell, it all boils down to execution, but if anyone has any additional thoughts, I’d be interested to hear about what other factors may play a role.

Ken MacFadyen
ken.macfadyen@sourcemedia.com