Bolder Strategies Key to Generating Shareholder Value from M&A
Fortune favors the bold — and fortunes can be generated by dealmakers who take bold, riskier M&A strategies, according to a recent M&A study.
24 September 2015
By Aiko Suyemoto and Meagan Parrish
Fortune favors the bold — and fortunes can be generated by dealmakers who take bold, riskier M&A strategies, according to a recent study that examined M&A deals involving more than 25,000 companies over a 20-year period. Conducted by Cass Business School and Intralinks, the study isolated the strategies of companies that are especially successful at generating above-average shareholder returns from their M&A activities, compared to their peers. Among the companies that consistently out-perform (called Excellent Corporate Portfolio Managers in the study, or ECPMs), having bolder M&A strategies with greater execution risk than other firms, was a common characteristic.
For example, ECPMs undertake a greater value of both cross-border and hostile deals as a proportion of their total M&A activity than other firms. In particular, cross-border deals account for 37% of total M&A activity by deal value for ECPMs, in comparison to 26% for other firms. ECPMs sell more to foreign buyers, with cross-border deals accounting for 35% of the value of all their divestments, compared to 26% of the value of all divestments for other firms. Further, hostile transactions account for 1% of total deal-making by value for ECPMs, which is double the 0.5% seen for other firms. On the execution side, ECPMs get their deals over the line more quickly: Only 33% of the value of all acquisitions and divestments by ECPMs are classified as slow to complete, whereas that figure is 34% and 39% for other firms, respectively.
Another research finding indicates that ECPMs make significant adjustments to their M&A strategies overtime as they account for market conditions and take advantage of valuation opportunities. ECPMs undertake acquisitions that are significantly smaller in comparison to their own size than other firms. According to data from the study, ECPMs have a ratio of the value of acquisitions to their own sales of 0.18x, compared to an average ratio of the value of acquisitions to their own sales of 0.26x for other firms. ECPMs avoid large transformational acquisition strategies which could incur execution or integration risk. Instead, ECPMs are more likely to focus on targeting more reasonably sized, “strategic” acquisitions that fill product, technology, or market gaps in their businesses.
Staying strategic is key to M&A success. A healthy balance of risk can help businesses gain competitive edge in their respective industries. To get your copy of the research, “Masters of the Deal: Part II" click here.”
Meagan Parrish is the Senior Manager of Social Media at Intralinks. She is responsible for social media strategy development and the communications for Intralinks' online communities. Meagan has been creating social media strategies for a variety of companies across verticals for the past several years. She holds Bachelor degrees in Marketing and Finance, with a minor in English Literature.