Measuring M&A Deal Success
How do you measure M&A deal success?
This has certainly been the focus of many studies, whether in academia or amongst practitioners. We’ve looked at it here on this blog (‘What is success in an M&A deal?‘) and also in our book (Intelligent M&A: Navigating the mergers and acquisitions minefield).
It was thus with great interest that I read a study conducted by Mergermarket for Merrill Datasite that discussed this (amongst other topics) within their overall report entitled ‘Post Merger Integration: The Key to Successful M&A‘. That study surveyed over 100 corporate executives globally.
Most observers of the M&A markets use shareholder return as the measure of deal success: it’s easy to determine and is easily understood. Differences only exist in determining
- a pre-deal starting point (do you use the share price the day before, one week before, a month before, etc in order to eliminate any impact of market leaks about the deal)
- the end point (immediate reaction on the day of announcement, closing (which may be months away from deal announcement), 90 days after closing, one year later, etc)
- which index to compare the share performance against (historical performance of the company itself, an industry index, an overall country index, etc).
The basic challenge is that it is difficult to isolate the impact of the deal when so much else is going on inside the firm and outside.
But if that’s what academics and analysts do, what do these internal senior executives use to determine success? Interesting, of the five factors mentioned most frequently, share price performance was last! Higher up the list (and in order of use) were 1) cash flow, 2) quality of new products / services, 3) expansion into new markets and 4) revenue of the newly-combined entity.
These factors do take time to determine — unlike share price performance, you don’t get an immediate, day-1 impact or result.
Thus timing is an issue and therefore there’s the question about what do these executives consider the correct time period within which to determine success? Only 5% said 6 months or less (even though a period less than 6 months is often used in academia). The largest group of executives — almost half at 46% — said one year after deal completion (which may be 15-18 months after the deal was announced) and another 38% said two years after completion. The remainder (10%) said that the success could only be determined after more than two years.
Lastly, related to this is how often the senior management team meet to discuss the progress of the integration and therefore the on-going success. Needless to say, they don’t wait long. Almost two-thirds (64%) said this was done monthly after the deal completed. Another 20% said weekly. Thus, the senior management team IS frequently looking at success in terms of the factors above, checking the changes in cash flow, new product introductions, new market opportunities, revenue changes and, of course, share price.
So we now know how executives themselves determine deal success. Why, then, do they continue to do these deals when the same survey showed that only 42% of these executives considered their acquisitions or mergers to be successful more than 50% of the time … which means that 58% considered most of their deals to be failures. Looks like we need to hold executives to their own determinants of success more often.