Why you should do an M&A deal now

Posted on Monday, 3 May 2010. Filed under: Commentary, Mergers |

Several months ago, Legg Mason strategist Michael Mauboussin published a report entitled ‘Surge in the Urge to Merge‘.  Based on some academic research reported in 2008 in the Academy of Management Journal, companies that invested in deals early in a merger cycle are more likely to be successful with their takeovers than those who invest at the peak or later.  From his own and that research, Mauboussin concludes:

  • An M&A wave may be on the way. If history is any guide, M&A activity tends to follow the stock market with a modest lag. The market’s bounce off of the March 2009 lows, when combined with more amenable credit market conditions, have set the tone for a resumption of active deal activity.
  • The early bird gets the worm. Academic research strongly suggests that companies doing deals early in the M&A cycle provide better returns for their shareholders than the companies that participate later. The reason is straightforward: early in the cycle there are more companies to choose from and the targets are cheap. As the cycle matures, options dissolve and valuations rise.

I agree with both of these conclusions.  As I have noted elsewhere (‘“Upside Risk” in M&A‘ and ‘M&A Forecast for 2010 — Update’), I believe we have bottomed out of the M&A cycle, which does mean that I agree that we are soon to be on the upswing … although I don’t think this will really happen until 2011 for behavioural reasons discussed several weeks ago in an article I wrote for the Financial Times entitled  ‘A tough challenge for M&A markets‘.  However, some industries will lead the market:  pharmaceuticals and media are two that I hear discussed more often recently, so they may already be at the start of their upturn.

I also concur and have done additional research that doing deals early in the M&A cycle will reward those who are brave enough.  In research that Cass Business School conducted for Towers Watson back in January 2010 (‘Corporate Deal Makers Have Reason for Optimism‘), we found that companies that completed a deal in 2009 outperformed their peers that were too timid to acquire — and by a not insignificant 3.2 percentage points.  Notably, those who did deals in the fourth quarter of 2009 outperformed their peers by 4 percentage points.

If more executives were bold enough and willing to use this information, they could convince their boards that they should not be shy but should seize the opportunities to expand through acquisition now.


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