Latepost Acquisition Archives: Winners As Well As Losers
In my finally post, I looked at HP's disastrous acquisition of Autonomy for $11 billion inward 2011 as well as its subsequent write off of $8.8 billion. While it stands out equally a particularly egregious instance of a bad deal, it is unfortunately non the exception. In fact, the evidence suggests that a growth strategy built closed to acquisitions, peculiarly of other publicly traded firms, is to a greater extent than probable to neglect than succeed. To dorsum this statement, you lot tin shipping away await at 3 pieces of evidence:
(a) the deportment of the acquiring company's stock price, closed to the annunciation of an acquisition
(b) the post-deal functioning (stock cost & profitability) of firms after acquisitions
(c) the overall runway tape of acquisition-based growth strategies, relative to other growth strategies
The acquisition date: Uninformed investors or Delusional managers?
When an acquisition of a publicly traded companionship is announced, the attending is by as well as large on the target theater as well as its stock price, but the market's reaction to the lawsuit is meliorate captured inward what happens to the acquiring firm's stock price. In the figure below, receive got a await at the target as well as acquiring theater stock deportment inward the xx days earlier as well as after the acquisition annunciation across hundreds of acquisition announcements:
The winner inward world companionship acquisitions is slow to location as well as it is the target companionship stockholders, who gain most 18% over the 41 days. On average, bidding companionship stockholders receive got piffling to demo inward terms of cost gains; the stock cost for acquiring firms drops most 2% during the annunciation menses as well as most 55% of all acquiring firms encounter their stock prices move down. Note that spell the percent cost drib is pocket-sized (relative to the cost increment for the target firm), acquiring firms are typically much larger than target firms as well as the absolute value that is lost past times acquiring theater stockholders from acquisitions tin shipping away live on staggering. A study of 12,023 acquisitions past times large marketplace seat cap firms from 1980 to 2001 estimated that their stockholders lost $218 billion inward marketplace seat value because of these acquisitions. While this set out was inflated past times some peculiarly bad deals done betwixt 1998 as well as 2000, they illustrate the potential for massive value losses from acquisitions as well as the reality that ane big, bad bargain tin shipping away undo decades of careful value creation inward a company.
There is ane concluding interesting statistic that tin shipping away live on gleaned from the annunciation engagement marketplace seat reaction. If you lot receive got the cumulative marketplace seat value of the target as well as acquiring firms, only earlier the acquisition annunciation as well as only after, that combined value increases, on average, across mergers. For meliorate or worse, this is what the marketplace seat seems to live on telling us at the fourth dimension of acquisitions announcements: it believes that there is value added from synergy or other sources inward the typical merger, spell at the same fourth dimension also believing that acquiring firms over guess the value of the synergy as well as pay also much.
The long term: Post-deal blues?
The defence that is offered past times acquiring companionship managers, when confronted amongst the market's negative reaction to the acquisition announcement, is that the reaction is rooted inward ignorance. Acquiring companionship managers claim to receive got access to data as well as forecasts that stockholders don't receive got as well as struggle that they are inward a meliorate seat to value "synergy" as well as "control". It is of class truthful that managers receive got to a greater extent than data on target theater than their stockholders do, but the proof is ultimately inward the pudding. To brand a judgment on whether this superior data pays off inward superior performance, let's await at whether acquiring firms deliver on the promised synergy as well as other benefits.
Post-deal stock cost performance: KPMG studied the 700 biggest mergers betwixt 1996 as well as 1998 as well as compared the stock cost functioning for a yr after the bargain was closed to that of the peer grouping to conclude that 83% of the companies underperformed after acquisitions. Thus, the negative reaction to acquisition announcements does non seem to dissipate over longer periods. In some adept news, KPMG has updated its M&A study 5 to a greater extent than times since its 1999 study as well as reports that in that location has been some improvement betwixt 1999 as well as 2011. While exclusively 31% of deals made inward the finally study (looking at 2007-2009 deals) were value adding, that is an improvement over the 17% from the 1999 study:
(a) the deportment of the acquiring company's stock price, closed to the annunciation of an acquisition
(b) the post-deal functioning (stock cost & profitability) of firms after acquisitions
(c) the overall runway tape of acquisition-based growth strategies, relative to other growth strategies
The acquisition date: Uninformed investors or Delusional managers?
When an acquisition of a publicly traded companionship is announced, the attending is by as well as large on the target theater as well as its stock price, but the market's reaction to the lawsuit is meliorate captured inward what happens to the acquiring firm's stock price. In the figure below, receive got a await at the target as well as acquiring theater stock deportment inward the xx days earlier as well as after the acquisition annunciation across hundreds of acquisition announcements:
There is ane concluding interesting statistic that tin shipping away live on gleaned from the annunciation engagement marketplace seat reaction. If you lot receive got the cumulative marketplace seat value of the target as well as acquiring firms, only earlier the acquisition annunciation as well as only after, that combined value increases, on average, across mergers. For meliorate or worse, this is what the marketplace seat seems to live on telling us at the fourth dimension of acquisitions announcements: it believes that there is value added from synergy or other sources inward the typical merger, spell at the same fourth dimension also believing that acquiring firms over guess the value of the synergy as well as pay also much.
The long term: Post-deal blues?
The defence that is offered past times acquiring companionship managers, when confronted amongst the market's negative reaction to the acquisition announcement, is that the reaction is rooted inward ignorance. Acquiring companionship managers claim to receive got access to data as well as forecasts that stockholders don't receive got as well as struggle that they are inward a meliorate seat to value "synergy" as well as "control". It is of class truthful that managers receive got to a greater extent than data on target theater than their stockholders do, but the proof is ultimately inward the pudding. To brand a judgment on whether this superior data pays off inward superior performance, let's await at whether acquiring firms deliver on the promised synergy as well as other benefits.
Post-deal stock cost performance: KPMG studied the 700 biggest mergers betwixt 1996 as well as 1998 as well as compared the stock cost functioning for a yr after the bargain was closed to that of the peer grouping to conclude that 83% of the companies underperformed after acquisitions. Thus, the negative reaction to acquisition announcements does non seem to dissipate over longer periods. In some adept news, KPMG has updated its M&A study 5 to a greater extent than times since its 1999 study as well as reports that in that location has been some improvement betwixt 1999 as well as 2011. While exclusively 31% of deals made inward the finally study (looking at 2007-2009 deals) were value adding, that is an improvement over the 17% from the 1999 study:
While this study tin shipping away live on faulted for its curt fourth dimension horizon (it looked at exclusively the yr after the merger for improvement), the consensus across many academic studies is that acquiring companies' shares nether perform their peer grouping over long periods (extending 3-5 years).
Post-deal operating performance: The evidence is mixed on measures of operating performance. While in that location are some studies that honor improvements inward operating margins after acquisitions, these gains seem to live on be for a subset of acquisitions (hostile seem to do meliorate than friendly) or exclusively for sub periods. McKinsey has looked at mergers over 3 decades, scream for 2 elementary questions of acquirers: (a) Does the acquisition generate a render on upper-case missive of the alphabet that exceeds the cost of upper-case missive of the alphabet for the deal? as well as (b) Does the acquisition Pb the acquirer to move to a greater extent than profitable than the peer group? In its studies that receive got spanned 3 decades, McKinsey constitute that most acquirers neglect at to the lowest degree ane of the 2 tests as well as that many neglect both.
In summary, if the sales pitch for an acquisition is that it volition aid boost the acquirer's stock cost as well as improve profitability, relative to the peer group, in that location is no evidence that either happens, at to the lowest degree on the typical acquisition.
Growing through acquisitions
For meliorate or worse, some companies direct to grow primarily through acquisitions as well as it is truthful that some succeed. For instance, Cisco transformed itself from a pocket-sized technology scientific discipline companionship to the largest marketplace seat cap theater inward the basis (very briefly inward 1999) past times acquiring dozens of other companies.
Firms are ofttimes attracted to an acquisition-based growth strategy, because it seems to offering a speedier pathway to success, but acquisitions are non the exclusively pick for growth. Influenza A virus subtype H5N1 companionship tin shipping away prepare novel products, receive got existing products inward novel markets or endeavour to capture a higher marketplace seat part of an existing market. The enquiry therefore becomes non whether a companionship should grow, but the most efficient agency to essay out that growth. Drawing ane time again on a McKinsey study of unlike growth strategies inward the consumer goods manufacture over several decades, nosotros encounter a disturbing picture:
The reward to investing inward growth is greatest for new-product development, where a ane one k thousand invested inward the strategy generates additional value of $1.75 ane one k thousand to $ 2 million, as well as generates the most hit for the buck (with part prices doubling amongst relatively pocket-sized revenue growth of 5-6% from the novel products). The reward to growth investing gets steadily worse across the adjacent 4 strategies as well as is worst amongst acquisitions, where a ane one k thousand investing inward acquisitions generates betwixt -.5 ane one k thousand to $.2 ane one k thousand inward additional value.
There are shades of nuance that are missed inward this aggregate picture. As I volition annotation inward a afterward post, in that location are subsets of acquisition strategies that do better; buying smaller rather than larger companies, someone equally opposed to world companies as well as strength-focused rather than me-too acquisitions. Notwithstanding these pockets of success, it remains truthful that it is hard to create value amongst an acquisition-based growth strategy as well as it becomes fifty-fifty to a greater extent than therefore equally the companionship gets larger. In fact, Cisco is a adept instance of the diminishing returns to acquisition-based growth, equally the same strategy that worked to dandy consequence inward the 1990s worked against the companionship betwixt 2001 as well as 2010.
And the illness is spreading
The scariest aspect of the acquisition illness (which destroys value) is that it is directly spreading to emerging markets. Emerging marketplace seat companies, which used to live on targets for richer developed marketplace seat companies, are directly inward a seat to live on acquirers as well as some of them are targeting developed marketplace seat icons. Looking at the prices they pay, as well as the practices they adopt, it is also clear that emerging marketplace seat companies are making the same mistakes that their developed marketplace seat predecessors did. A study of the stock cost deportment inward the days earlier as well as after the annunciation of 114 acquisitions of U.S. of A. of America companies past times Indian companies illustrates the problem:
While the initial reaction to acquisition announcements is positive, market disillusionment amongst the acquisition sets inward apace as well as the cumulative returns deplete over time, turning negative equally you lot acquire to 20 days after the announcement.
Why do companies persist?
Given this history of value destruction, you lot would intend that companies would move to a greater extent than measured inward pursuing acquisition-based strategies. That, unfortunately, does non seem to live on the case. Not exclusively do nosotros move along to encounter big, bad deals, but nosotros ofttimes encounter the same companionship repeatedly making bad deals as well as the same mistakes repeated over as well as over past times other companies. Not exclusively is in that location no learning built into the process, but this repeated losing deportment would advise that in that location is some collective irrationality at play (a euphemism for insanity) or that the acquisition procedure is flawed, as well as inward the posts that follow, I volition receive got a closer await at both possibilities. I volition start past times by putting the objectives as well as incentives of the fundamental players inward the acquisition procedure nether a microscope, starting amongst the top managers inward both the acquiring as well as target companies, next upwards amongst the "advisors" (investment banks, commercial banks as well as consultants) on these deals, as well as ending amongst the accountants whose labor it is to render data on the deals. I volition therefore await at the mechanics of the process, get-go focusing on mutual errors that I encounter inward acquisition valuations as well as therefore looking at how best to value "control" as well as "synergy". I volition closed amongst a post service on how to improve the odds of success amongst an acquisition-based growth strategy, drawing on lessons from history.
The Acquisition Series
HP's bargain from hell: The mark-it-up as well as write-it-down 2 step
Acquisition Archives: Winners as well as Losers
Acquisition Hubris: Over confident CEOs as well as Compliant Boards
Acquisition Advice: Big bargain or adept deal?
Acquisition Accounting I: Accretive (Dilutive) Deals tin shipping away live on bad (good) deals
Acquisition Accounting II: Goodwill, to a greater extent than plug than asset
For meliorate or worse, some companies direct to grow primarily through acquisitions as well as it is truthful that some succeed. For instance, Cisco transformed itself from a pocket-sized technology scientific discipline companionship to the largest marketplace seat cap theater inward the basis (very briefly inward 1999) past times acquiring dozens of other companies.
Firms are ofttimes attracted to an acquisition-based growth strategy, because it seems to offering a speedier pathway to success, but acquisitions are non the exclusively pick for growth. Influenza A virus subtype H5N1 companionship tin shipping away prepare novel products, receive got existing products inward novel markets or endeavour to capture a higher marketplace seat part of an existing market. The enquiry therefore becomes non whether a companionship should grow, but the most efficient agency to essay out that growth. Drawing ane time again on a McKinsey study of unlike growth strategies inward the consumer goods manufacture over several decades, nosotros encounter a disturbing picture:
There are shades of nuance that are missed inward this aggregate picture. As I volition annotation inward a afterward post, in that location are subsets of acquisition strategies that do better; buying smaller rather than larger companies, someone equally opposed to world companies as well as strength-focused rather than me-too acquisitions. Notwithstanding these pockets of success, it remains truthful that it is hard to create value amongst an acquisition-based growth strategy as well as it becomes fifty-fifty to a greater extent than therefore equally the companionship gets larger. In fact, Cisco is a adept instance of the diminishing returns to acquisition-based growth, equally the same strategy that worked to dandy consequence inward the 1990s worked against the companionship betwixt 2001 as well as 2010.
And the illness is spreading
The scariest aspect of the acquisition illness (which destroys value) is that it is directly spreading to emerging markets. Emerging marketplace seat companies, which used to live on targets for richer developed marketplace seat companies, are directly inward a seat to live on acquirers as well as some of them are targeting developed marketplace seat icons. Looking at the prices they pay, as well as the practices they adopt, it is also clear that emerging marketplace seat companies are making the same mistakes that their developed marketplace seat predecessors did. A study of the stock cost deportment inward the days earlier as well as after the annunciation of 114 acquisitions of U.S. of A. of America companies past times Indian companies illustrates the problem:
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| Indian acquirers: Months earlier & after acquisitions |
Why do companies persist?
Given this history of value destruction, you lot would intend that companies would move to a greater extent than measured inward pursuing acquisition-based strategies. That, unfortunately, does non seem to live on the case. Not exclusively do nosotros move along to encounter big, bad deals, but nosotros ofttimes encounter the same companionship repeatedly making bad deals as well as the same mistakes repeated over as well as over past times other companies. Not exclusively is in that location no learning built into the process, but this repeated losing deportment would advise that in that location is some collective irrationality at play (a euphemism for insanity) or that the acquisition procedure is flawed, as well as inward the posts that follow, I volition receive got a closer await at both possibilities. I volition start past times by putting the objectives as well as incentives of the fundamental players inward the acquisition procedure nether a microscope, starting amongst the top managers inward both the acquiring as well as target companies, next upwards amongst the "advisors" (investment banks, commercial banks as well as consultants) on these deals, as well as ending amongst the accountants whose labor it is to render data on the deals. I volition therefore await at the mechanics of the process, get-go focusing on mutual errors that I encounter inward acquisition valuations as well as therefore looking at how best to value "control" as well as "synergy". I volition closed amongst a post service on how to improve the odds of success amongst an acquisition-based growth strategy, drawing on lessons from history.
The Acquisition Series
HP's bargain from hell: The mark-it-up as well as write-it-down 2 step
Acquisition Archives: Winners as well as Losers
Acquisition Hubris: Over confident CEOs as well as Compliant Boards
Acquisition Advice: Big bargain or adept deal?
Acquisition Accounting I: Accretive (Dilutive) Deals tin shipping away live on bad (good) deals
Acquisition Accounting II: Goodwill, to a greater extent than plug than asset
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