Do mergers and acquisitions create value for shareholders?

As global competition increases, companies buy other companies, and owners demand more top-line growth to increase shareholder value.

Some business owners believe that acquisitions transform their businesses and can give them a competitive advantage through new value propositions and focused business strategies.

An M&A event: value creation or destruction? It comes down to aspects the acquirer can control and market conditions that can rapidly change a good deal into a financial or operational challenge.

The acquirer’s shareholders must understand the acquirer's integration capabilities and where the potential for value creation lies.

From the target’s perspective, it is about valuation and the probability of closing.

Yet over two-thirds of all mergers and acquisitions (M&A) fail to produce the projected synergies and financial numbers.

Why is that?

A survey early this year included six hundred global senior corporate executives from across industries and geographies.

They asked executives about their experiences with value creation through M&A.

Here are the highlights of the findings:

Ninety-two percent of acquirers said they had a value creation plan in place for their last deal, but only sixty-one percent of buyers believed their last acquisition created value.

Fifty-three percent under performed vis-à-vis their industry peers, on average, over the 24 months following completion of their last deal based on total shareholder return (TSR).

From a seller’s perspective, forty-two percent of divestors likewise said their last sales generated value, relative to the value that business would have created had it not been sold.

Around thirteen percent said their last divestment generated significant value, and thirty-five percent said their last deal lost value.

Additionally, fifty-seven percent of divestors under performed vis-à-vis their industry peers, on average, over the 24 months following the completion of their last deal, based on TSR.

Thirty-four percent of acquirers said value creation was a priority on Day One (deal closing) in their last deal, but sixty-six percent of deal makers say value creation should have been a priority right from the start.

Simply put, some acquirers focus on integrating the hard tangible assets (e.g., financial, accounting, and operations systems) to achieve value. But they neglect the soft but equally important intangible assets (e.g., people and culture).

Problems might also stem from acquirers’ inability to create synergy, paying too high a premium, selecting inappropriate targets, and ineffective integration processes.

A careful selection of targets and effectively implemented acquisitions can achieve synergy and create value. For example, the difference in sizes between the acquiring company and the target company influences value creation. If the target company is much smaller than the acquiring company, it is unlikely to affect value creation.

However, if the target company has capabilities complementary to those held by the acquiring company, an opportunity for synergy creation exists.

But as the difference narrows and value creation grows, integration often becomes a problem. It leads to a value loss even if the two companies are of equivalent size.

While gaining a competitive advantage through M&A is a business strategy for growth, continued success depends on how acquirers understand the importance of deal selection, deal management and governance, and post-deal integration.

Let us look at these three considerations that emerged from recent research:

Value creation depends on how the process from merger preparation to post-merger integration is managed. This process includes a robust strategy, a thorough assessment of whether the deal is worth pursuing, and a clear M&A methodology.

A successful M&A process uses these best practices: thorough evaluation of the target companies’ strategic interests and of the potential synergies; resource and cultural management; and a solid communication strategy that helps facilitate change management, achieve an ideal balance, and raise value creation.

It is crucial to develop a strategy that prioritizes value at every stage of the deal, start early, and be thorough in considering every opportunity, ensuring that deal mechanics add value, key talents remain engaged in integration, and a clear strategy is in place.

(Credit extracts: PwC)