The Right M&A Strategy to Outperform the Market and Your Peers

Does firms’ past performance drive M&A frequency or does the frequency of M&A activity drive future business performance? New M&A research provides insight.

1 December 2014


Wouldn’t it be great to outperform the market and drive shareholder value? It can be done, as long as you have the right M&A strategy for your business.

Most research studies have tried to evaluate shareholder value creation from M&A by looking at the impact of individual deals over short time periods. But to truly determine what the right M&A approach is, we at the Cass Business School, City University London partnered with Intralinks for a study which analyzed the M&A activity and business performance of 25,000 global organizations (who engaged in over 200,000 M&A deals) over a time period of 20 years.

Unlike past studies, our research looked at the overall business performance of companies across multiple time periods; using a sample set of global, publicly-listed companies. By using time-series regression analysis, we were able to find the causality links between the M&A frequency and business performance of the organizations. From there, we were able to discover if firms’ past performance drives M&A frequency or the reverse — whether in fact, the frequency of M&A activity drives future business performance.

How to Outperform the Market with Acquisitions and Divestments

Our research into the relationships between M&A performance and its effect on shareholder value creation found that when a strategic approach is applied to M&A portfolio management, companies can significantly outperform the market and their peers.

The study shows that when firms are inactive in terms of announcing M&A activity (acquisitions or divestments), they will underperform the market, and significantly underperform those companies that are active. The total shareholder return performance of firms that announce no M&A deal is 1.5 percent per year lower than the market and 3.2 percent per year lower than firms that announce only one or two deals in a three year period.

On the other hand, firms that frequently announce acquisitions will outperform the market. Additionally, the total shareholder return performance of the firm will increase as the firm’s acquisitions increase. For companies that announce less than one M&A deal annually, they will outperform the market by 0.1 percent per year. If firms announce one to two acquisitions annually, or more than two, they will outperform the market by 2 percent per year, and 3.4 percent per year, respectively.

For divestment activities alone, firms’ shareholder return performance decreases significantly with an increasing number of divestments. Such that companies will underperform the market by over 3 percent per year during periods when they announce more than, on average, one divestment annually. Firms will only outperform the market when they announce a limited number of divestments. The total shareholder return performance during periods when firms announce only one to two divestments annually is 2.3 percent per year above the market.

The Right Approach Based on the Age of Your Company

Additionally, our research found a link between the M&A activities and the maturity-level of the company when it comes to driving shareholder value.

The right M&A strategy should reflect the stage in your company’s lifecycle.

  • Young companies: When you’re a young company in your first three years of public listings, you should buy to signal growth to the market. Usually, young companies that are in their first three years of public listing tend to underperform the market. However, if these newly-public companies have an M&A strategy at the time of listing, and can complete acquisitions frequently within their first three years, they will be able to significantly outperform the market. This type of active M&A behavior by young companies’ sends positive signals to the market that they have a strong inorganic growth strategy and can execute it.
  • Mature companies: If you’re an older company, you should still buy, but you should also get rid of your underperforming (or no longer core) assets as well. After the three years point post going public, when companies have reached a level of maturity, organizations can outperform the market with a limited number of divestments — about one to two every three years.

So back to our original question, does firms’ past performance drive M&A frequency or does the frequency of M&A activity drive future business performance? Overall, poorer M&A performance in past periods can drive organizations to be either inactive or active, which will then drive future underperformance (for inactive firms) or future outperformance (for active firms). Stronger past performance of M&A activities can drive firms to become over-active, which may drive down future returns, leading to underperformance.

Some closing thoughts: If your firm doesn’t already have a M&A strategy, it’s time to adopt one to avoid underperformance, as the market appears to reward companies with such a strategy. As noted above, the study shows that inactive firms underperform the market, and also more significantly, underperform against their more active competitors. Organizations that have a strategic M&A program will deliver better shareholder returns. By engaging in frequent acquisitions, businesses will remain competitive and send positive signals to investors that they have a strong inorganic M&A growth strategy. Such a strong inorganic strategy which complements an organic strategy will pay off in the long-run with the reward of increased shareholder value.

If you’d like to read the full study, you can download a complimentary copy of the report, “Masters of the Deal: Part 1 — Learning from the best performers” today.

Professor Scott Moeller

Professor Scott Moeller

Scott Moeller is the director and founder of the M&A Research Centre at Cass Business School where he also a Professor in the Practice of Finance. Scott’s most recent book, published by John Wiley & Sons, was published in July 2009: Surviving M&A: Making the Most of Your Company Being Acquired. Another book now in a 2014 second edition (co-authored with Professor Chris Brady) is entitled Intelligent M&A: Navigating the Mergers and Acquisitions Minefield and discusses the role of business intelligence in major financial restructurings, and received a number of awards.

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