Dealmaking drives shareholder returns

BY Richard Summerfield

Organisations that regularly buy and sell companies as part of their wider corporate strategy often outperform less active acquirers in terms of shareholder returns, according to a new report from the Boston Consulting Group (BCG).

According to the firm's 2016 M&A report 'Masters of the Corporate Portfolio', over a 25 year period up to 2015, the average annual shareholder return for companies that make at least five acquisitions or divestitures in a five-year period was 10.5 percent. One time dealmakers, however, saw returns of just 5.3 percent.

"Portfolio masters use active portfolio management via M&A to boost shareholder return," said Jens Kengelbach, BCG's global head of M&A and co-author of the report. "These companies buy and sell in order to fine-tune, refocus, or diversify their portfolios. They understand that growth is the primary driver of TSR, almost regardless of whether growth is organic or inorganic. They estimate synergies and postmerger integration costs accurately, and they deliver on their projections. They create value."

The report compares three types of dealmakers: ‘portfolio masters’, ‘strategic shifters’ and ‘one-timers’. The company’s data shows that portfolio masters accounted for just 6 percent of the 1339 companies surveyed, but were responsible for around 25 percent of global deal volume since 1991. In that time, portfolio masters completed nearly 14,000 transactions. By comparison, so called ‘one-timers’ made, on average, one acquisition or divestiture each over a five-year period. But, with a combined count of 18,891 deals since 1991, they represent 35 percent of total M&A deals globally.

"Investors like one-time dealmakers -- at least in the short term," said Georg Keienburg, a BCG principal and report co-author. "Capital markets tend to buy into the story of a once-in-a-lifetime opportunity for acquirers. They are also appreciative when a company sheds a noncore asset that it may have held onto for too long. As a result, the initial capital market reaction in a narrow time window around the transaction is distinctly more positive (an average increase of 5.5 percent) for one-time dealmakers than for their more active counterparts."

Companies can improve their shareholder returns by improving their standing in the M&A market, according to BCG. Indeed, the classifications of companies can be fluid, and by evolving from being considered a one-timer to strategic shifter or portfolio master, companies can drive shareholder value.

Report: The 2016 M& Report – Masters of the Corporate Portfolio

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