January 31, 2017

Study: Big Stock-Based Deals Pose Risk to Stock Performance

This report from S&P Global Market Intelligence Quantamental Research analyzes the market performance of Russell 3000 companies following an acquisition greater than 5% of acquirer enterprise value between 2001 & 2016. It finds that post-M&A acquirer share price returns have underperformed peers in aggregate for the 1-, 2-, and 3-year periods following the acquisition. The findings include:

Common Attributes Found in Successful Deals: Shareholders looking to identify successful acquisitions should look at acquisitions that use high levels of cash, have had lower historical growth, have repurchased shares, and make relatively small acquisitions.

Acquirer Fundamentals Suffer Following Big Deals: In the aggregate, acquirers lag industry peers on a variety of fundamental metrics for an extended period following an acquisition. Profit margins, earnings growth, and return on capital all decline relative to peers, while interest expense rises, debt soars, and other “special charges” increase.

Stock Deals Significantly Underperform Cash Deals: Acquirers using the highest percentage of stock underperform industry peers by 3.3% one year post-close and by 8.15 after three years. Acquirers with the highest one-year cumulative M&A spending underperform by 2.0% one year post close and by 9.3% after three years.

Rapid Growth Pre-Acquisition is a Bad Sign: Acquirers with the highest pre-acquisition asset growth underperform by 5.8% one year post-close and by 13.3% after three years, while those with the highest pre-acquisition increase in shared outstanding also underperform significantly.

Investors Beware Cash on Balance Sheet: Acquirers with the highest level of pre-acquisition cash & equivalents relative to assets underperform peers by 8.6% over one year and 10.1% over three years.

Broc Romanek