While debate rumbles on as to whether organic expansion or an acquisition is the better path to achieving growth goals, one thing is clear: acquisitions are associated with positive short-term stock returns.
Willis Towers Watson and Cass Business School analyzed 8,324 M&A deals around the globe worth at least $100 million and completed from Jan. 1, 2008, through Sept. 20, 2018. The study looked at the change in acquirers’ share prices from six months prior to acquisition announcements to the end of the quarter in which deals were completed.
Acquirers outperformed the market (defined as the MSCI World Index) following 55% of deals, which generated $227 billion in incremental equity value. The 45% of deals that underperformed the market left on the table just a third of that dollar amount, $74 billion, compared to overall market performance.
“Some business leaders argue that organic growth is better than buying growth, but the track record of the last decade should make companies question this conventional view,” says Jana Mercereau, a senior director of Willis Towers Watson’s mergers and acquisitions team.
However, could it be that the tide is turning? While positive returns following deals outweighed negative returns in 8 years among the 11 years studied, two of the three negative years were 2017 and 2018 (see chart at the bottom of this page).
“Deal making is cyclical and success never guaranteed, with recent years proving especially difficult to deliver a deal without harming shareholder value,” says Mercereau. “But the historical success of M&A as a growth strategy comes into sharp relief when you take a long-term view.”
She adds, “Our analysis suggests that companies will need to focus more on inorganic growth to meet their investors’ expectations. And just as we have seen in the last decade, the winners will be those who get in the game and learn how to play it well.”
Drilling down into the study data, the bigger the deal, the better the equity return. Deals valued at more than $10 billion beat the MSCI World Index by 4.3 percentage points, while those valued between $1 billion and $10 billion outperformed by 2.9 percentage points.
Transactions valued between $100 million and $1 billion performed a marginal 0.1 percentage points above the index. Willis Towers Watson notes that blockbuster deals are typically pursued by companies with significant M&A experience, which likely explains why they are more adept at delivering the biggest rewards for shareholders.
In other trends, Chinese M&A activity reached historic highs in the last decade and doubled its market share, rising from 3.5% of the global M&A market in 2008 to $7.2% in 2018. Despite government restrictions on capital outflows and rising protectionism, Chinese investment is still expected to reach further highs over the next decade.
Also, U.K.-based companies have consistently beaten the MSCI European Index, by an average of 3.7 percentage points over the study period. So far, the market doesn’t seem too concerned about Brexit.
Just as in the United Kingdom, deal-makers Europe-wide have outperformed non-acquirers by 3.7 percentage points. Additionally, results for European acquirers have been more consistently superior than those in any other region, with a net positive equity return in 9 of the past 10 years.
In contrast, U.S.-based acquirers have outperformed their regional MSCI index by just 1.55 percentage points.
An average outperformance of 8.3 percentage points puts Asian acquirers in the lead worldwide. However, roller-coaster swings in the region have seen acquirers failing to add value for the last seven quarters in a row.
On an industry basis, technology and telecommunications companies completing M&A transactions performed the worst by actually destroying value over the study period, with underperformances of 1.5 and 0.5 percentage points.
Materials and consumer staples companies that completed deals delivered the strongest returns (5.6 and 5.3 percentage points).
Of course, the positive association between acquisitions and equity returns is not the whole story when it comes to assessing M&A. Indeed, other studies have come to the conclusion that a majority of deals ultimately fail to achieve their objectives.
In some cases that’s measured by metrics other than stock returns. For example, in a 2018 survey of senior corporate executives by Grant Thornton, only 14% of respondents said their deals have exceeded their initial expectations for income or rate of return.
In fact, just about everything about the success vs. failure of M&A deals seems subject to debate. Indeed, some studies suggest that it’s actually small acquisitions, not large ones, that create the most value.
David Hunt, like Mercereau a senior director of Willis Towers Watson’s mergers and acquisitions team, defends the firms methodology.
“Analysts have been debating the different ways to evaluate the success of acquisitions for a long time,” Hunt says. “Most models look at a company’s performance vs. its expectations using subjective or deal-specific measures. While we would not claim that our study tells the complete story, it’s one of the few studies that uses objective data to measure the external market’s view on whether management will be able to deliver incremental value from M&A.”