Why Taking Risks in M&A Should Pay Off

If you don’t have a solid M&A strategy for your company, it’s time to get one to avoid underperformance. Research reveals taking risks in M&A may pay off.

8 July 2015


If you don’t already have a solid M&A strategy for your company, it’s time to get one to avoid underperformance.

The conventional way of thinking is that M&A deals fail to generate shareholder value, based on findings that look at near-term returns from often isolated transactions. In a recent study that the M&A Research Centre at Cass Business School conducted in association with Intralinks, we examined approximately 25,000 companies over a 20 year period that involved in over 265,000 transactions, to evaluate the relationship between M&A and shareholder value creation.

Our research took a different approach from the conventional wisdom, looking across a company’s entire portfolio of transactions over a very long period of time, in contrast to most studies that look at individual deals in isolation. What we uncovered is that when a strategic approach is taken to M&A deal portfolio management, companies can significantly outperform the market and their peers.

The results of the research demonstrate that participating in M&A more often and engaging in a set of specific strategic activities will generate greater shareholder returns.

Common Attributes of Successful M&A Strategies

We closely evaluated the M&A strategies of the top performing companies (which we refer to in the report as “Excellent Corporate Portfolio Managers” or ECPMs) from a shareholder value creation perspective. The research revealed the common attributes in ECPMs’ M&A strategies which had a significant influence on their outperformance over other firms and market. Based on the findings, ECPMs:

  • Have bolder M&A strategies, with greater execution risk such as going cross border
  • Achieve faster deal completion
  • Have greater engagement with financial sponsors and public companies
  • Employ more all-cash consideration for acquisitions
  • Undertake smaller acquisitions, relative to their own size
  • Make a greater value of acquisitions than divestments

Being Bold  

As highlighted above, the research revealed that ECPMs engage in a higher proportion of riskier business deals than other firms. Interestingly, ECPMs initiate a higher number of both cross-border and hostile deals in relation to their total M&A activity.

  • Cross-border transactions account for 37% of total M&A activity deal value for ECPMs, compared to 26% of the value of all acquisitions by other firms.
  • ECPMs make nearly 4x as much hostile acquisitions as other firms, accounting for 1% of the value of all acquisitions and divestitures, compared to 0.5% for other firms.

[caption id="attachment_2862" align="alignnone" width="737"]Masters of the Deal: Part II Report Source: Masters of the Deal: Part II Report[/caption]

Findings from the study suggest that ECPMs are willing to engage in more risk taking in their M&A strategies, which can lead to higher performance, rather than taking the easy road with deals that are simple to achieve. When conducting interviews with some of the ECPMs, we spoke with one vice president of corporate development at a U.K. engineering firm that agrees with this result: “M&A is now a well-exploited strategy. The opportunities have therefore shrunk and risk-free deals are unlikely to yield the desired results. In the current environment, portfolio managers therefore have to take risks.”

The research suggests that ECPMs are also more strategic with acquisitions and divestments compared to other firms. As the chart above illustrates, ECPMs are highly engaged with private equity firms and public companies in regard to buying and selling assets. Results show that 10% of the value of ECPMs’ acquisitions and divestments are with a private equity firm, compared to 7% of the value of other firms’. Further, 50% of the value of ECPMs’ acquisitions and divestments are with another public firm compared to 43% of the value of other firms’.

So next time you want to play it safe with a deal, think again. A risky deal may just be what your M&A strategy needs. If you’d like to get a copy of the research to help inform your corporate M&A strategy, you can download the report “Masters of the Deal: Part II” here. Let us know what you think of the research in the comments below.

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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