New Views on Mergers and Acquisitions
April 4 2006 - Contrasting strongly with findings from the past
20 years, the current round of merger and acquisition (M&A) deals tend to be financially
successful and generate more shareholder value, according to a study by London's Cass Business School, in
conjunction with Towers Perrin, a global professional services firm.
The Cass - Towers Perrin research looked at 218 international deals worth
between US$400 million and US$1.5 billion (inflation-adjusted)
concluded in 1988, 1998 and 2004. Company performance was analyzed for a one-year
period - six months before and six months after each deal was closed - to evaluate the relative
degree of financial success.
The study found that, in 2004,
businesses involved in M&A deals worth over US$400 million (but excluding the
biggest mega deals), outperformed the market by 7%. This compared with an underperformance
of approximately 3% and 6%, respectively for companies involved in similar deals in the
M&A cycles of 1998 and 1988.
Marco Boschetti, principal and leader of Towers Perrin's M&A consulting practice said:
"A paradox exists in the world of mergers and acquisitions. Other studies
that have looked at M&A deals in the past 20 years have found that deals in earlier M&A
cycles destroyed, rather than created, shareholder value. Yet to grow to be an
organization operating on a global scale, it is almost impossible to do so quickly enough
through organic growth alone. Mergers and acquisitions have in many ways become necessary.
Interestingly, evidence is now mounting that the deals conducted in the current merger
wave may be different. Across a broad range of industries throughout the world, lessons
learned are being applied."
According to Tower Perrins media release, deal success has been better
in the current wave of mergers (those closed since 2003) on every single financial and share performance factor analyzed by
Cass Business School, compared with the two major waves of the late 1980s and 1990s.
"We believe this success is a direct consequence of companies' improved
management of the M&A process, from target selection and pricing, to due diligence to
implementation," said Boschetti. "In the future, this learning curve will certainly
continue. So, while gaining competitive advantage through M&As is now a legitimate
business strategy for growth, long-term success will depend on increasingly sophisticated
According to the Towers Perrin media release, the improved financial success of recent M&As comes from
improvements in three areas of corporate behavior:
- Better deal governance. Senior business management has a much closer alignement
with shareholders on the aims and objectives of corporate transactions. Today's managers
are more likely to approach a deal rationally and focus on financial
objectives. This implies that mergers in earlier cycles may have been more influenced by emotional factors.
- Better deal selection: Due diligence processes have become
more rigorous for M&A deals. For many businesses, due diligence currently includes financial
assessment and quantification of factors such as corporate benefit programs like pensions and
their financial liabilities. These may not have been considered in earlier deals.
- Better focus on integration: Improved corporate behaviour and
strategies for post-deal implementation also produced stronger financial performance
for M&A transactions during 2004. Specifically, businesses focused more
on the implementation phase as a time to
identify the merged companies' financial synergies and deliver results.
In post-deal integration, retention and
engagement of employees at all levels of the
organization is increasingly acknowledged as having a direct impact on the operational success of
M&As. This, in turn, is a key driver of M&A financial success.
"If M&As are now a successful business strategy for achieving above-average
share performance, then ignoring M&A opportunities might place companies at risk of
underperformance," Boschetti added. "But if M&A activity is becoming a competitive
necessity, it is still a risky one, and companies engaging in this growth strategy would
do well to ensure they understand the importance of deal management and governance, deal
selection and integration. If they do not, they risk becoming one of the few cautionary
tales of this wave or the next."