Which M&A Activities Drive the Most Shareholder Value?

Which M&A activities drive the most shareholder value? New M&A research by Intralinks and the Cass Business School, City University London addresses this.

18 November 2014


We know that doing deals can help organizations grow quickly — whether by expanding their solutions, scaling operations, or simply, by establishing new market opportunities.

But the real questions is, does M&A deliver shareholder value?

Earlier studies on shareholder value originating from M&A activity center on how individual deals impact value over short periods of time — generally showing strong positive returns for targets and negative returns for acquirers.

But we wanted to dive a little deeper. To truly answer the question above, we conducted research in association with the M&A Research Centre at Cass Business School, City University London, into the relationships between M&A activity and shareholder value creation. Together, we evaluated the business performance and M&A activity of 25,000 global companies, over a span of 20 years.

The global study analyzes the effect of M&A on companies’ performance in respect to their M&A program over multiple time periods. The findings revealed that the relationships between M&A activity and shareholder returns are more complex compared to previous notions. Such, that when a strategic approach is taken to M&A portfolio management, organizations can outperform the market considerably (as well as their peers). A few of the study’s key findings include:

  • M&A inactivity leads to underperformance — Companies underperform the market during periods when they announce no acquisitions or divestments, and even more significantly underperform companies that announce 1-2 deals a year. We found that shareholder return for inactive companies is 1.5% per year lower than the overall market and 3.2% per year lower than companies that announce 1-2 deals per year.
  • More frequent acquisitions leads to better performance — Companies outperform the market the more frequently they announce acquisitions. Companies outperform the market by 0.1% per year during periods when they announce 1-2 acquisitions, by 2% per year during periods when they announce 3-5 acquisitions and by 3.4% per year during periods when they announce six or more acquisitions.
  • Moderate divestment activity results in better performance — Considering just divestment activity, companies only outperform the market during periods when they announce a limited number of divestments, and significantly underperform the market when they announce a higher frequency of divestments. Total shareholder return during periods when companies announce 1-2 divestments is 2.3% per year above the market. However, companies underperform the market by 3.3% per year during periods when they announce 3-5 divestments and underperform by 3.6% per year during periods when they announce six or more divestments.
  • Young companies outperform the market when they announce a high frequency of acquisitions — Newly publicly-listed companies underperform the market by 5.6% per year during their first three years after listing. However, when these young companies announce six or more acquisitions during their first three years, they outperform the market by 3.8% per year.
  • Older companies outperform the market when they announce a limited frequency of divestments — Only medium-aged and mature companies (those which have been publicly listed for 3-9 years and 10 or more years, respectively) outperform the market when announcing 1-2 divestments every three years.
  • Companies with a strategic M&A portfolio management program deliver better shareholder returns — Companies deliver greater total shareholder returns when they have a balanced strategic M&A portfolio management program. This would include at least one acquisition per year and 1-2 divestments every three years (but only once they have been publicly listed for at least three years).

How can we interpret these findings?

I believe that the following conclusions can be drawn from the findings of this study:

  • Get a dealmaking strategy — If you don’t have an M&A strategy, then you should consider getting one. Otherwise, as a company, you may be risking underperformance. As the study shows, inactive firms underperform the market, and also more significantly, underperform against their more active competitors.
  • Engage in frequent acquisitions for outperformance — Companies that engage in frequent acquisitions outperform because they are doing two things:
    • Signalling to investors that they have an inorganic (M&A) growth strategy, that complements their organic growth, and that they can execute on this strategy. A combination of M&A and organic growth will accelerate their growth — for this, they are rewarded by total shareholder return outperformance versus the market.
    • By buying more frequently, firms gain experience and become better at it — from target screening, selection, deal execution and integration. All of this may lead to faster growth.
  • Young companies can outperform with the right strategy — Generally, young companies (in their first three years of public listing), significantly underperform the market (more risk, volatile earnings, etc.). However, young companies which list and have an M&A strategy at the time of listing, and can execute frequent acquisitions in their first three years, can buck this trend and significantly outperform instead. Again, I would argue that what is going on here is signalling behavior by young M&A-active companies that they have a positive inorganic growth strategy and can execute on it. This behavior appears to be rewarded by outperformance.
  • Older companies can outperform with the right frequency of divestments — Once a company has reached a level of maturity (after three years), selective, limited divestments (1-2 every three years), may also appear to be associated with outperformance. As an example, think of this as an occasional pruning of a company’s business portfolio to weed out non-core or underperforming assets, with the proceeds available to recycle into more value-enhancing acquisitions.
  • An M&A strategy should reflect the company’s maturity lifecycle — A company’s M&A strategy is not static, but should reflect the different stages in a company’s development such that:
    • When you are young, buy frequently to signal growth to investors
    • Overall, the more frequently you buy, the better you will become at it
    • When you are older, keep on buying, but also look to occasionally shed assets that are not contributing to growth or financial performance.

If you’d like to learn more about our research, you can download a complimentary copy of the report, “Masters of the Deal: Part 1 – Learning from the best performers” today.

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