Posted on 08 Jul 2009
Companies that completed mergers or acquisitions since the beginning of the downturn are outperforming their non-acquisitive peers by 6.3% globally, and 9.1% in North America, according to a recently completed financial study by Towers Perrin and the Cass Business School in London. Performance was even stronger when financial services companies were removed from the analysis, with the deal makers besting market indexes by 7.8% globally and 10.0% in North America. The study analyzed 204 deals globally (104 in North America) with a value greater than $100 million that were completed between September 15, 2008 (the day Lehman filed for bankruptcy) and May 31, 2009.
The study shows that companies forging ahead with transactions despite the recessionary pressures of this period have picked up bargains and seen better returns than those not doing deals at all. While returns were negative all around, the declines were significantly less for the deal-making group, which produced, on average, a negative shareholder return of 25.5%, compared to a negative shareholder return of 31.8% for the rest of the market.
“The collapse of Lehman Brothers marked a watershed in international market activity, and we wanted to examine how such a traumatic event has affected M&A behavior,” said David Hinkel, senior consultant in Towers Perrin’s M&A practice. “We’ve seen many companies holding back on deals, nervous to commit in the post-Lehman world. These findings indicate there is value to be found even in this difficult climate, and that fears about current M&A activity — whether because of valuation difficulties or economic volatility — are misplaced.”
The study also shows that the more deals done by a company, the better its performance relative to the market overall. Repeat acquirers over that same period — of which there were 15 companies completing 32 deals — outperformed the MSCI World Index by 8.1%. The 10 North America-based companies that undertook multiple deals in this time frame also outperformed both the market and peers that completed just one deal, besting the overall market by 13.3%.
“Viewing all of the findings together, it’s clear that so-called downturn deals can and do deliver, rather than destroy, value,” Hinkel noted. “This should give companies still struggling with decisions in this economy a reassuring push forward. Those that act decisively and quickly — taking advantage of reduced competition for good assets at better prices — are more likely to position themselves effectively for faster growth than peers as the economy begins to turn around.”
Other key findings emerging from the global study:
* Companies acquiring within their own country borders outperformed the market by 7.7%, whereas acquisitions across borders only outperformed by 4%.
* Deal makers in financial services performed only 0.4% better than the global market, yet outperformed their peer group by 14%.
* Health care was the best-performing industry, with a 13.8% better return. The technology sector outperformed by 9.3%, and energy by 7.3%.
Making Deals Work
“Despite the good news that downturn deals create the conditions for success, companies that want to sustain above-market performance through and beyond the downturn need a robust execution capability,” said Hinkel. “It would be a mistake for companies to take their eye off all of the areas that we know ensure deal success, from detailed due diligence to flawless integration of programs and practices across the affected organizations. For companies now readying to go back into the market to seek targets, the current lull in activity can be an ideal opportunity to get ready.”
To maximize return on M&A investments, Towers Perrin recommends that downturn deal makers should:
* Remain diligent about due diligence: Jumping into a transaction because the price appears low is not only irresponsible, but can be hugely damaging.
* Focus on integration execution: Grab synergies fast, and ensure a focus immediately on areas of critical value — leadership, culture, rewards, communications, workforce deployment and selection and staffing.
* Be prepared: Use the relative lull in M&A activity to train staff and improve execution capabilities. Being ready pays off in speed and quality of execution.
“In the final analysis, companies that are good at deals are always hunting for opportunities, and have systems and processes in place to move quickly for the right purchase,” said Hinkel. “Repeat acquirers get better returns because they are resourced well, are flexible enough to react, and are clear about what will work strategically and culturally. That’s the recipe for success to which all companies need to aspire.”
A summary of the analysis by Towers Perrin and Cass Business School is available on request.
* The Towers Perrin/Cass Business School study was based on data from the Thomson One Banker Mergers & Acquisitions database.
* The study included deals with a value greater than US$100 million (204 in all) completed between September 15, 2008 and May 31, 2009. (Only mergers and acquisitions of companies or business divisions were included.) The performance analysis covers the period from six months prior to deal announcement through to the market close at the end of May 2009. This is the period used to assess share price and to compare to the MSCI World Index. The figures are the median of performance results among the deals.
* The acquirer had to own 100% of the target/asset following the deal.
* All adjustments were calculated using share price development less index development for the same period, and then averaged by using median.
By industry, the only sectors with a statistically significant sample for individual examination were financial services, health care, technology and energy.