One size does not fit all: the complex relationship between M&A and shareholder returns


Financier Worldwide Magazine

March 2015 Issue

March 2015 Issue

There’s no question that doing deals can help a company to grow quickly. By expanding in this way, organisations can gain access to new market opportunities or enhance their products and services. What is less clear is whether M&A actually delivers value for shareholders.

Until this point, it has been widely thought that M&A deals tend to reward the seller but not the acquirer. Previous studies, which usually focus on the impact of individual deals over relatively short periods of time, seem to have confirmed this. However, the relationship between M&A activity and shareholder returns is more complex than previously thought, and when a strategic approach is taken to M&A portfolio management, companies can significantly outperform the market and their peers.

In order to take a closer look at the question of shareholder value, Intralinks and Cass Business School conducted a study examining the performance and M&A activity of 25,000 global companies over a 20 year period. It is the first comprehensive global study to look at the effect of M&A on companies’ performance in the context of their overall program of M&A activity over multiple time periods. The findings challenge the conventional belief that M&A deals show strong positive returns for targets and negative returns for acquirers.

The study found that organisations are able to outperform the market and their peers considerably when M&A portfolio management is handled more strategically. Companies outperform the market during periods when they make frequent acquisitions, while M&A inactivity is associated with significant underperformance. The study also found that young companies, within three years of being publicly listed, only outperform the market when they announce a high frequency of acquisitions.

So, for established companies keen to increase value in the long term, the best advice is to have an active M&A portfolio management strategy, and make at least one acquisition per year. Strategies and markets change over time, so buying and selling is usually a smart plan and is recognised as such by the market. It shows companies are constantly adapting and moving with the times, not obstinately sticking to outdated strategies.

The study also found that increasing frequency of acquisition activity appears to be associated with increasing shareholder returns. The more frequently you buy, the higher you’ll fly.

Acquisitions signal growth plans to the market. If they are a natural fit, such as plugging innovation gaps, expanding offerings to core audiences, or moving into complementary markets, research shows they will usually deliver long term value to the acquirer.

Big acquisitions make the headlines, but far more important to most investors is a steady, managed growth plan built around acquiring complementary businesses that expand the acquirer’s capabilities.

In terms of divesting, the study found that firms only outperform the market during periods when they announce a limited number of divestments, one every three years. But they significantly underperform the market when they announce a higher frequency of divestments. A little divestment is a good thing. Firms that undertake a limited number of carefully considered divestments are more likely to enhance their growth by, for example, selling non-core assets. This signals to the market they are selectively pruning assets which are no longer core to their business strategy in order to increase focus or give themselves financial flexibility – potentially to perform value-creating acquisitions. However, firms announcing lots of divestments tend to signal to the market that they are doing so for reasons of strategic, operational or financial difficulty and therefore, at least in the short term, tend to lose value.

If a firm does have a major divestment program, investors may assume the worst. As long as this is not the case, it is very important that they clearly communicate why this is being pursued, to head off this natural market suspicion.

The study also took a close look at the effect of an organisation’s maturity on shareholder value. Young firms tend to only outperform the market during their first three years as public companies, when they announce a very high frequency of acquisition activity. This is because investors keep a closer eye on them because they are unproven, but high levels of acquisitions signal ambitious growth plans.

The optimum M&A strategy for ‘young’ firms – defined as those which have been publicly listed for a maximum of three years – is different from companies that are medium-aged (those firms which have been publicly listed for more than three but less than 10 years) and those that are mature (publicly listed for at least 10 years). Newly publicly listed companies are expected to achieve rapid growth, including through M&A activity. Making a significant number of acquisitions in the three years after listing is viewed positively by investors and is rewarded accordingly.

Once companies become more mature they should continue to seek acquisition opportunities for growth, but the study found that those firms over 10 years old performed better with a somewhat lower frequency of acquisitions than the medium-aged and young firms. A mature firm may need to think more carefully about the consequences of adding and integrating new acquisitions to an existing portfolio of businesses and products in order to achieve expected returns and synergies.

Finally, the study looked at the causality relationships between frequency of M&A activity and shareholder value. The study discovered a causality link between firms’ past performance and future frequency of M&A activity, and between frequency of M&A activity and future performance, which offers a possible explanation for the cyclical nature of M&A.

Companies with a strategic M&A portfolio management program tend to deliver better shareholder returns. Based on the results of this study, medium-aged and mature companies, on average, deliver superior total shareholder returns with a balanced strategic M&A portfolio management program – a program that includes at least one acquisition per year and one to two divestments every three years. Young companies, however, only outperform the market with a much higher frequency of acquisitions and no divestments.

This unprecedented study, and its subsequent interpretations, should play a key role in providing dealmakers with the important insight they need to shape M&A strategy in future. The relationship between M&A activity and shareholder returns has proved to be more complex than previously thought, and when it comes to deal activity, it’s clear that one size certainly does not fit all.


Philip Whitchelo is vice president of strategy and product marketing at Intralinks.

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Philip Whitchelo


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