New BCG Study Identifies Major Trends That Will Continue To Drive M&A Through Volatile Financial Markets
The study also explodes a number of myths about M&A. Among the contrarian findings:
It Doesn't Always Pay to Be Friendly
Hostile deals are viewed significantly more favorably by investors in today's market than they were in the preceding wave of M&A (1997-2001). This could be because most deals since 2002 have been consolidation mergers. Establishing a harmonious relationship with the target tends to be less important in this type of M&A because the primary goal is usually to realize cost synergies through rationalization, as opposed to growth synergies by teaming-up capabilities.
M&A Often Creates Substantial Value
Although 58.3 percent of deals between 1992 and 2006 destroyed value for acquirers, with a net loss of 1.2 percent for all transactions, the average deal produced a net gain to shareholders of 1.8 percent when returns of the targets are taken into account. Moreover, the majority of deals (56 percent) created value for the combined set of shareholders. In addition, acquirers in several industries, including automotive and retail, created value, on average, as did acquirers in the Asia-Pacific region.
Cash Is King
Cash-only transactions have a much more positive impact on value than deals that rely on stock, a mix of stock and cash, or other payment contributions.
The authors point out that in today's M&A environment, sitting on the sidelines holds risks as well. It not only exposes a company to the threat of a hostile bid, it also gives rivals the opportunity to snatch prime targets and gradually erode the company's competitive position.
"In consolidating industries, joining the brave new world of M&A may be the only way to survive -- eat or be eaten," said Alexander Roos, a Berlin-based partner who coauthored the report with Gell, Kees Cools in Amsterdam, and Jens Kengelbach in Munich. "To avoid becoming prey, companies need to raise their game and adopt a much more professional and systematic approach to M&A."
Among the authors' recommendations:
Professionalize M&A like any other industrial process, with a strong strategic logic and a rigorous post-merger integration, formulated before a deal is concluded
Conduct a high-resolution valuation of prospective targets, including assessing the costs of not doing a deal
Learn from private equity, including the possibility of leveraging up with greater debt
(This is press release of Boston Consulting Group)
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