While many prognosticators have predicted a return of merger and acquisition volumes in North America this year, we aren’t seeing many signs of an M&A rebound yet.
That’s a missed opportunity for Directors and C-Suite executives of companies with the balance sheet strength and access to credit to fund acquisitions, because a recent Accenture study shows that M&A consistently creates value for the acquirer’s shareholders.
While the Dow continues to fluctuate, unable to sustain gains, one would think that CEOs would be eager to exploit any means of growing revenues and raising share prices.
There is a “magic wand” that we’re surprised isn’t being waved more frequently by CEOs anxious to placate unsatisfied shareholders and activist investors. That magic wand is M&A.
An Accenture research report published earlier this year found that acquirers seem to be getting better at creating value from acquisitions. This research challenges the conventional wisdom that most deals destroy value and stands it on its head.
The study, which examined the 500 largest acquisitions announced by publicly traded companies between the summers of 2002 and 2009, found that value can be created from M&A in any industry, in any part of the macroeconomic lifecycle, for any transaction size, anywhere in the world.
While many historic surveys suggest that two thirds to three quarters of all large deals destroy shareholder value, the Accenture analysis found that fully 58 percent of deals greater $2.2 billion created value. Further, 39 percent created shareholder returns that beat the acquirer’s S&P industry index by 20 percent or more 24 months after announcing the deal.
If you’re a CEO looking for great returns, those are great odds – significantly better than one would get at a blackjack table in Las Vegas.
Further, the downside risk of “bad deals” is relatively small. The study found that only 22 percent of these large deals – less than one in four – drove the acquirer’s stock to underperform versus its S&P industry index by more than 20 percent over 24 months. In other words, the odds of great success are almost twice as good as the odds of clear failure.
And while some industries create more shareholder value from M&A than others – mergers in banking, consumer goods, and metals, mining and natural resources industries were particularly successful - top quartile performers in every industry studied succeed in creating value from M&A regardless of year, deal size or geography.
While we can’t say for sure why M&A success is improving, the research can offer some advice to CEOs who are searching for an opportunity to drive shareholder value:
- Think big, but not too big: Even for multibillion dollar deals, smaller ones perform better than larger ones. Deals less than $20 billion perform better than larger deals.
- Look for new markets: Deals for targets in emerging economies on average create more value than deals for targets in developed economies
- Get the timing right: Not surprisingly, deals announced during the “upswing” of the macroeconomic cycle tend to create more value than deals announced during the slide into the trough
M&A remains an underutilized means to create hard-to-come-by value for long-suffering shareholders. There’s no good reason why deal volumes shouldn’t be going through the roof right now. And the results to be gained from large M&A are much better than most executives have traditionally believed.
The author is Tom Herd, managing director of Accenture’s North America Mergers & Acquisitions Practice