"The time to buy," said Baron Rothschild, "is when there's blood in the streets."
These days it's hard enough for many managers to keep their businesses afloat, much less think about taking risks. After all, excessive risk-taking is what put us in the current financial mess.
Yet a few companies, big and small, are daring to go against the grain. They're scouring the bankruptcy courts for deals, getting tough with suppliers on prices, and muscling in on rivals—all to gain advantage for the eventual upswing. Fiat has successfully snapped up the bulk of assets in Chrysler, overcoming opposition. Toys 'R' Us has bought FAO Schwarz to gain market share. Procter & Gamble ( (PG)
) is investing heavily in research while others cut back. Novartis is betting its future on discoveries linked to diseases most people have never heard of.
For most executives, it just doesn't feel right to go aggressive now. But the Great Recession might be one of those rare periods when the wisest move a manager can make is to suspend his natural instincts. Imagine a driver on a snowy night. If the car starts to slip, the natural response would be to slam on the brakes and jerk the wheel in the opposite direction. But the laws of physics advise the opposite: laying off the brakes and steering into the skid.
That's not to say this is a time for recklessness. Quite the opposite: Fear focuses managers' minds better than greed, research shows. After the 2001 recession, Boston Consulting Group studied deals done from 1985 to 2000, through good times and bad. It found the average merger in a downturn created an 8.3% rise in shareholder value after two years, while the average deal in good times resulted in a 6.2% drop in the buyer's shares. The authors' conclusion: Acquirers move more carefully and squeeze out profits more aggressively when the pressure is on.
In this unstable environment, managers need to strike the right balance between caution and boldness. Making any move now is difficult, says BCG senior partner Gerry Hansell, because "people are scared, and the bar for getting approval is pretty high." At the same time, "history is on the side of companies that buy at the bottom," says Paul Parker, head of global mergers and acquisitions at Barclays Capital ( (BCS)
). Success will come to those with "the vision to see down the road, the creativity to collect resources, and the ability to take risks," says consultant Ram Charan.
set out to analyze which global players are taking the right kinds of risks. Some companies come to the endeavor easily, with cash hoards and business models geared to a slowing economy. Others are taking real chances. In the pages that follow you'll meet cautious acquirers, interlopers seeking to expand in far-off lands, long-term strategic thinkers, and entrepreneurs with big plans. Their tactics differ, but these executives share one thing: a desire not merely to survive the recession but also to thrive. P&G Chief Operating Officer Robert A. McDonald, who's slated to become CEO on July 1, calls it weiji, a Chinese term that combines crisis and opportunity. Managers can react with fear or make smart bets.
THE PRUDENT EXPLOITERS
For Valero Energy's ( (VLO)
) S. Eugene Edwards, the deal seemed tantalizing: Sixteen ethanol plants were on the block, and their owner, VeraSun Energy, was in bankruptcy court. After a brief dustup with a rival bidder, Valero walked away this spring with seven of the best plants, plus a site for another. The total cost was $477 million, a fraction of their worth. "We got first-quality plants at 30 cents on the dollar," says Edwards, who heads strategic planning at San Antonio-based Valero.
A steep drop in prices for ethanol led to VeraSun's fall. While that scared rivals, it made Edwards eager to pounce. Valero, the nation's biggest oil refiner, has a long history of snapping up distressed assets during tough times. But this is its first move into the volatile game of ethanol production. It helped that Valero had more than $1 billion in cash and that its CEO, William R. Klesse, shared his lieutenant's view that trends in Washington bode well for ethanol's long-term prospects. Federal mandates through 2022 require gasoline refineries to add increasing amounts of ethanol. Locking up a supply now may cut out middlemen and set the stage for Valero to sell ethanol to other companies.
Sunoco ( (SUN)
) is rushing into ethanol, too. On May 19 it won court approval for its $8.5 million bid for an ethanol plant from bankrupt Northeast Biofuels. A Sunoco spokesman says the upstate New York facility, the biggest ethanol operation in the Northeast, could provide 25% of the company's ethanol by 2010.
With scientists complaining loudly that corn ethanol requires more energy to produce than it yields, the recent deals are chancy. But Valero and Sunoco are betting that the Obama Administration's commitment to biofuels diminishes that risk. And both will be well positioned if corn-based ethanol gives way to ethanol variations based on prairie grass and other sources.
TROUBLE IN TOYLAND
The retail slump has put pressure on the bottom line of Toys 'R' Us. But the Wayne (N.J.) retailer has responded by going on its own shopping spree. On May 27, it acquired upscale FAO Schwarz for an undisclosed price. The deal gives Toys 'R' Us desirable locations in New York and Las Vegas and a promising Web site, says BMO Capital Markets analyst Gerrick L. Johnson, who praises the move. This is the second major purchase the 1,500-store chain has made this year. In March, Toys 'R' Us snapped up Web retailer eToys.com to gain a broader marketing reach in toys, clothes, and consumer electronics. One reason for the expansion drive is the profitability of Toys 'R' Us, which was bought by Bain Capital Partners, Kohlberg Kravis, Roberts & Co. and Vornado Realty Trust in 2005. Operating profits dipped only $75 million, to $621 million, in the year ended January 2009. That has given the retail chain a cushion, however slim, to build market share.
In many cases a company that's lurching toward bankruptcy is best avoided altogether. Bank of America ( (BAC)
) thought it was making a great deal when it agreed last year to purchase struggling Merrill Lynch. The transaction quickly torpedoed BofA's profitability and has led to a $34 billion capital gap that the bank must fill by September or face more government intervention.
But another deal struck at about the same time has turned out much differently. Last year Barclays Capital ( (BCS)
) chose to cherry-pick valuable assets from bankrupt Lehman Brothers instead of buying the whole company.
The decision is already paying off. Barclays recently jumped to No. 4 from No. 39 in the business of advising companies on mergers. The bank counseled Wal-Mart Stores ( (WMT)
) on its purchase of Chile's Distribucion y Servicio ( (DYS)
) last December, a deal that Barclays' Paul Parker, a former Lehman merger-and-acquisition executive, says neither the old Barclays nor Lehman would have landed separately. What's more, Barclays could break Lehman's record for corporate bond underwriting this year, says President Robert E. Diamond Jr. In the first quarter, Barclays was lead underwriter on 8 of the 10 biggest corporate bond offerings, including the largest agency bond ever: a $15 billion issue for Fannie Mae ( (FNM)
) in February.
All that stems from Diamond's decision last September to buy Lehman assets at a time when others were running scared. "We stood back and said, 'This is almost too good to be true,' " he recalls. While the acquisition "was a risk," says Diamond, it has left Barclays much stronger.
with Mara Der Hovanesian
THE OVERSEAS ADVENTURERS
While many companies are scaling back their global ambitions amid the recession, others are looking to gain a bigger foothold abroad.
Consider Spain's Inditex, owner of clothing retailer Zara. With annual sales of $14 billion across 4,264 outlets, Inditex has been praised for its supply-chain management. "The essence of our business model—the ability to react over the course of the season—means our business can perform well in a range of economic environments," says CEO Pablo Isla.
Now Inditex is expanding aggressively. It's adding as many as 450 stores this year. In October, Zara will open a three-level store on Chicago's Michigan Avenue, its 42nd in the U.S., taking space formerly occupied by struggling Talbots ( (TLB)
). Zara is expanding and refurbishing the 33,000-square-foot location, its first in downtown Chicago and second in the Midwest. A month later it will open a 10,250-square-foot store at a new open-air site at the Florida Mall in Orlando. "With so much prime retail space currently unoccupied, especially in the U.S., Inditex is negotiating better deals," says Alfred Vernis, a professor of business policy at ESADE Business School in Barcelona.
Toronto's TD Bank Financial Group ( (TD)
) is also on the march in the U.S. Having sidestepped toxic subprime mortgages, in part because of tough rules imposed by Canadian regulators, TD now has plenty of capital with which to expand. Boasting more than 1,000 U.S. branches from Maine to Florida, TD is opening dozens more this year. "Nobody can outrun the recession, but we continue to be a positive outlier," says Executive Vice-President Fred Graziano. "We've avoided the issues other banks are dealing with." Aiming to pry away customers of struggling American banks, TD is lending heavily for housing. It also keeps its branches open seven days a week, 361 days a year, catering to time-pressed consumers.
ON THE PROWL
Perhaps the most closely watched overseas players are the European automakers, which see a chance to expand quickly in the U.S. Volkswagen's ( (VLKAY)
) luxury brand, Audi, is boosting its U.S. ad budget by as much as 20% this year as U.S. rivals pull back on ads. "When the clutter is dying down, our message can be very, very visible," says Johan de Nysschen, executive vice-president at Audi of America.
Italy's Fiat ( (FIATY)
), meanwhile, successfully completed a deal to take a 20% stake in Chrysler on June 10. That gives the maker of the Fiat, Lancia, and Alfa Romeo brands a bigger slice of the U.S. market. Asian carmakers are on the prowl, too. After offering rebates to boost U.S. sales, Korea's Kia Motors plans to open a factory in Georgia by yearend. This would be Kia's first U.S. plant and represents a sizable risk for the Korean carmaker. Many auto analysts believe that even when the U.S. car market revives, it won't come close to the lofty 17 million vehicles per year the industry sold earlier in the decade.
with Kerry Capell and David Welch
THE DARING EXPANSIONISTS
Many companies respond to recessions by slashing research and development and other projects to conserve precious cash. But those that dig deep into their pockets and take risks during downturns are often rewarded. McKinsey says high-performing companies are twice as likely to hike R&D spending in tough times.
Procter & Gamble ( (PG)
) would seem to have every reason to hunker down. In April it posted its first earnings drop in seven years as consumers chose cheaper alternatives to its Gillette razors and Tide detergent. Investors remain skittish about P&G's prospects over the next several months.
But the company isn't retrenching. Instead, it's daring to boost its fiscal 2009 R&D budget 4.5%, to $2.3 billion, estimates Wall Street research firm Sanford C. Bernstein. It's also launching the biggest capital expansion in its 171-year history: 19 new factories worldwide over the next five years. "We're always looking for opportunities to invest and, through that investment, create competitive advantage," says Chief Operating Officer Robert A. McDonald, the company's next CEO. "This crisis is an opportunity to do that." P&G executives say the long-term outlook for consumer spending is so positive that they must make major moves now.
SLASH AND SPEND
Some companies are even cutting current expenses while spending on long-term initiatives. Southwest Airlines ( (LUV)
) recently offered employee buyouts to trim payroll costs. But it's also adding a few key cities to its route map. Southwest recently started flying to Minneapolis-St. Paul and will bring New York and Boston into the network soon. "We don't want to get too far ahead of ourselves and take on too much risk," says CEO Gary C. Kelly. "You just have to be in a position of strength to take advantage of opportunities."
Wal-Mart ( (WMT)
), meanwhile, might have the ideal business model for an economy like this. But it isn't content to sit back and collect its growing profits. Instead it's expanding into regions it has been unable to tap fully—including Chicago, where the company is trying to open a supercenter on the troubled South Side.
with Roger O. Crockett
THE QUICK AND THE AGILE
A lot of small players are using their one advantage—nimbleness—to exploit the recession by rolling out new products and services. With credit tight, they're able to make big bets by quickly shifting resources and employees to meet changing demands.
One player gaining ground is BATS Global Markets, a Lenaxa (Kan.) outfit that has used superfast computer technology—especially suited to trading firms that buy and sell huge quantities of securities at a time—to become the nation's third-largest stock exchange in just three years. In May, BATS (short for Better Alternative Trading System) handled 10.2% of all the equities trading in the U.S., up from 8.5% a year before. The company has expanded into London and is exploring opportunities in Canada and the Pacific Rim. CEO Joe Ratterman says "firms that are flexible and don't carry a lot of overhead can often take the ball and run with it while the bigger firms have to pull back."
LESS BUYING, MORE REPAIRING
The sour economy has even helped some small businesses take off. JustAnswer, a San Francisco company that lets customers ask questions of experts in almost any field for a small fee, had been chugging along for five years when the recession hit. As the housing market crashed and homeowners slowed their purchases of new appliances, CEO Andy Kurtzig anticipated a demand for repair services. He's devoting an ever-increasing portion of his marketing budget to appliance repair advertising, more than he's spending on any other area—a potentially risky move. Much of that has gone to buying key words on Google ( (GOOG)
) and other search engines.
It worked: JustAnswer has seen a 57% increase in questions about repairs over the past year. Some of the sharpest jumps have come in the number of questions asked about common—but expensive—household items. Refrigerator- and computer-repair queries have risen 409% and 780%, respectively. "It's been remarkable. We're seeing tons of growth," says Kurtzig. "We're spending a lot of time and money bringing in new customers."
The common thread among successful entrepreneurs is that they're daring to be aggressive rather than defensive amid the weak economy. "Don't react to what competitors may be doing," advises Dave McMahon, an associate professor of marketing at Pepperdine University. "Carve your own niche."
with Brian Burnsed
Business Exchange: Read, save, and add content on BW's new Web 2.0 topic network
The M&A Seesaw Swings Back to Corporations
With private equity bidders in short supply, corporate buyers are back in the driver's seat, according to a report by Boston Consulting Group. Moreover, BCG concludes, the retreat by private equity funds has made prices more attractive—and deals more likely to pay off for buyers.
To see the full report, go to http//bx.businessweek.com/mergers-and-acquisitions/reference/.