September 5, 2007

New M&A Study Shatters Several Myths

Conducted by The Boston Consulting Group, one of the largest-ever M&A studies – “The Brave New World of M&A: How to Create Value from Mergers and Acquisitions” – identifies several trends that will continue to drive high deal flow, albeit at a reduced rate, through current volatility in the global financial markets. Believed to be the largest nonacademic study of its kind, the study is based on a detailed analysis of more than 4,000 completed deals between 1992 and 2006. (Hat tip to the Directors & Boards’ e-briefing for the study findings below.)

The study also explodes a number of myths about mergers and acquisitions, including:

Private Equity Is Winning by Paying Less – It’s commonly assumed that PE firms have gained an increasingly large share of the M&A market by using their huge reserves of capital to pay over the top for targets. But BCG’s analysis indicates that, on average, PE firms pay lower multiples and lower acquisition premiums than “strategic” buyers.

Higher Acquisition Premiums Do Not Necessarily Destroy Value – Between 1992 and 2006, value-creating deals had a 21.7 percent premium, on average, compared with an 18.7 percent premium for non-value-creating transactions.

Bigger Isn’t Necessarily Better – Deals over $1 billion destroy nearly twice as much value on a percentage basis as deals below $1 billion. And deals destroy progressively more value as the size of the target increases relative to the size of the acquirer.

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).

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.