Valuation: Measuring and Managing the Value of Companies
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View SourceThat said, the medians conceal important details. Note that the band of 25th to 75th percentiles is very large and overlaps across the different acquisition strategies. Of all the categories, the distribution of the programmatic acquirers has the most positive skewing, and these acquirers also have the highest percentage of companies outperforming. Large deals skewed heavily negative. The case of organic companies is interesting for its very wide distribution of results. This is not surprising, since the sample includes fast-growing, younger companies with high TSRs that may think it too early to embark on much M&A, as well as declining or troubled companies focused on managing decline. We also found that the results varied by industry. For example, large acquisitions tended to be more successful in slower-growing, mature industries, where there is great value to reducing excess capacity. By contrast, large deals in faster-growing sectors underperformed significantly. In those companies, the inward focus required to integrate a large acquisition diverted management’s attention from the need for continual product innovation. Only the programmatic acquirers tended to outperform across most industries. The results are also consistent with 2017 research by Fich, Nguyen, and Officer, who found that large companies acquiring small companies tend to create more value than when they buy large companies.10
The news is not all bad for large acquisitions. Researchers have identified specific factors that differentiate successful deals from unsuccessful ones, based on returns to the acquirer’s shareholders. This research points to four important characteristics:
Strong operators are more successful. According to empirical research, acquirers whose earnings and share price grew at a rate above the industry average for three years before the acquisition earn statistically significant positive returns on announcement.11 Another study found similar results using the market-to-book ratio as a measure of corporate performance.12
Low transaction premiums are better. Researchers have found that acquirers paying a high premium earn negative returns on announcement.13
Being the sole bidder helps. Several studies have found that acquirer stock returns are negatively correlated with the number of bidders; the more companies attempting to buy the target, the higher the price.14
Private deals perform better. Acquisitions of private companies and subsidiaries of large companies have higher excess returns than acquisitions of public companies.15
