M&A Deal Success in 2008

Posted on Monday, 19 May 2008. Filed under: Commentary, Mergers |

Now is the time to do deals.  Conventional wisdom may say that with the volume of M&A deals declining, a company should pause in its acquisition programmes.  No.  Please don’t so so.

Earlier today, Towers Perrin published a research report on the historical success of deals in the year after the M&A market has peaked.  Towers Perrin sponsored this research conducted by one of my researchers, Kate Chalova, and me at Cass Business School.  See coverage of this in eFinancial News, Wall Street Journal Market Watch, Dow Jones, The New York Times Deal Book, and Management Today amongst others and as covered as well today on the TV by CNBC.

We’re assuming, of course, that 2007 will have been the peak of this most recent (can we still call it current?) merger wave.  That makes 2008 the post-peak year.  Thus, 2008 corresponds best to 2000 (the year following that merger wave’s peak in 1999) and 1990 (following the 1989 peak).  When we looked at data in those two prior merger waves, we found incontrovertible evidence that the returns in the post-peak year exceeded those of the peak year and the years leading up to the peak.  Here’s our chart:

Deal Share Price Performance (Over / Underperformance vs Global MSCI Index)

  Deal Share Price Performance (Over / Underperformance vs Global MSCI Index)

 

In this climate, more than ever, deals will be scrutinised to see if they deliver value. Our previous findings have shown that the current merger wave has consistently reversed the historical trend and has been good for value creation. In previous waves, on average, value had been destroyed. But even then, the post-peak years have shown that sense came to play as the market cooled and value was created by companies not caught up in the froth of the market. So our analysis should provide positive grounds for confidence for corporations who have the ability to do deals today and for their shareholders. Based on our analysis, there is significant potential upside to doing a deal in 2008, a post-peak year, even though it may be even more necessary than ever to select deals carefully.

As I said in the press release about the study, in this climate, more than ever, deals will be scrutinized to see if they deliver value. This analysis should provide some confidence for both corporations that have the ability to do deals today and for their shareholders. Based on our analysis, there is significant potential upside to doing a deal in 2008, a post-peak year, even though it may be even more necessary than ever to select deals carefully

Why is this so?  Obviously, one reason is that there’s less hype in the market and that the cost of buying a company may be lower.  But there are other reasons as well.  Fewer auctions.  Better focus on deal selection because the market is going down and it may be less obvious why deals should be done (and thus deals are more difficult to justify to sceptical boards).  The declining market itself may be a discipline that keeps companies from doing poor deals.  In another report issued a few days after ours, Boston Consulting Group came to the same conclusion using some of the same information.

The full press release can be see on the Towers Perrin website here, which also provides a link to the full report.

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