M&A: Big is not always beautiful

Consulting firm Accenture’s study shows that a significant percentage of M&A deals fail to create shareholder value, and that small deals create more value than big ones.
Sushil Saluja: M&A success rates have increased
Sushil Saluja: M&A success rates have increased

It’s the season to take count of league table tallies. This is when everyone studies the rankings: to ensure year-end targets are hit, to explain why they haven’t been met if that is the case and to formulate pitches for awards and bonus presentations.

For bankers, the focus is on whether or not deals cross the line. But for CEOs, boards and shareholders, the real measure of a deal is if it succeeds in the long term. Bankers looking to ensure repeat business with corporate clients should also mind that metric, which raises an old question: Does M&A destroy value or create it?

According to consulting firm Accenture, which analysed the 50 biggest transactions in 11 countries in Asia for a total of 550 deals made by publicly traded buyers between 2002 and 2011, only 51% of the deals added shareholder value and 30% of deals “significantly” destroyed it.

While 51% may seem like a dismal success rate and enough to discourage CEOs from undertaking acquisitions, this is an improvement from past numbers, according to consultants.

“Conventional wisdom has shown that acquisitions are often hit or miss in creating value,” said Sushil Saluja, senior managing director, financial services, Asia Pacific at Accenture. “But our recent research show that success rates have increased.”

Under what circumstances are deals likely to create value? According to Accenture, companies created more shareholder value when they bought businesses during early bull markets or markets in the initial phases of an economic recovery.

“If you are on a ride up to the peak in a bull market, there is less internal management pressure to reverse economic trends and management can focus on getting a company to perform as best as it can,” said Saluja. “During a downturn, there is less management bandwidth to handle the integration of an acquisition.”

The right timing for an acquisition is debatable, however, as some bankers argue that it makes sense for companies to make acquisitions during a downturn, when assets can be found on the cheap.

Size does matter, but not necessarily in the way you think. As it turns out, with M&A, small is good. Smaller deals create value more consistently. Deals valued at less than $500 million had the highest return to the top-quartile performers, while those greater than $2 billion had the lowest return.

So while the mega-deals make headlines and push up the rankings on league tables, the smaller transactions may be the way forward, as they have a higher success rate historically at adding shareholder value.

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