New research conducted by Intralinks Holdings conducted in association with the Mergers and Acquisitions Research Centre (MARC) at Cass Business School, City University London, that identifies the relationships between M&A activity and shareholder value creation.
The study finds that companies significantly underperform the market during periods when they announce no M&A activity (whether acquisitions or divestments) and even more significantly underperform companies which are actively engaged in M&A. Contrary to most previous research studies, which have only focused on the impact of individual deals over shorter time periods, this study finds that companies outperform the market the more frequently they engage in acquisitions. The study also finds that a limited amount of divestment activity by companies also leads to market outperformance. In addition, the findings reveal that companies tend to deliver superior total shareholder returns with a balanced strategic M&A portfolio management programme, which includes at least one acquisition per year, as well as conducting 1-2 divestments every three years.
“Most previous academic studies on shareholder value creation from M&A focus on the impact of individual deals over relatively short time periods, and typically show strong positive returns for targets and negative returns for acquirers. These new research findings challenge this conventional thinking,” says Phillip Whitchelo, vice president of strategy and product marketing, Intralinks. “This is the first comprehensive global study which analyses the effect of M&A on companies’ performance in the context of their overall programme of M&A activity over multiple time periods. The results show that the relationship between M&A activity and shareholder returns is more complex than previously thought, and that when a strategic approach is taken to M&A portfolio management, companies can significantly outperform the market and their peers.”
Key findings of the study, which examined the performance and M&A activity of 25,000 global companies during rolling three-year periods over 20 years, include:
Companies underperform the market during periods when they announce no M&A deals (whether acquisitions or divestments), and significantly underperform companies that announce 1-2 deals. Total shareholder return for inactive companies is 1.5% per year lower than the overall market and 3.2% per year lower than companies that announce 1-2 deals.
Considering acquisition activity alone, companies outperform the market the more frequently they announce acquisitions. Companies outperform the market by 0.1% per year during periods when they announce 1-2 acquisitions, by 2% per year during periods when they announce 3-5 acquisitions, and by 3.4% per year during periods when they announce six or more acquisitions.
Considering divestment activity alone, companies only outperform the market during periods when they announce a limited number of divestments, and significantly underperform the market when they announce a higher frequency of divestments. Total shareholder return during periods when companies announce 1-2 divestments is 2.3% per year above the market, but companies underperform the market by 3.3% per year during periods when they announce 3-5 divestments, and underperform by 3.6% per year during periods when they announce six or more divestments.
Overall, newly publicly-listed companies underperform the market by 5.6% per year during their first three years after listing. However, when these young companies announce six or more acquisitions during their first three years, they outperform the market by 3.8% per year.
Older companies outperform the market when they announce a limited frequency of divestments
Only medium-aged and mature companies (those which have been publicly listed for 3-9 years and 10 or more years, respectively) outperform the market when announcing 1-2 divestments every three years.
Companies with a strategic M&A portfolio management programme deliver better shareholder returns
Companies deliver superior total shareholder returns with a balanced strategic M&A portfolio management programme, which includes at least one acquisition per year, while also conducting 1-2 divestments every three years (but only once they have been publicly listed for at least three years).
“This is an unprecedented study of global M&A deal activity with important insights for dealmakers,” says Scott Moeller, professor in the practice of finance at Cass Business School, City University London, one of the co-authors of the study. “For example, previous studies have shown that newly-listed companies often are active acquirers, but this study is the first to link that activity to company, not just deal, performance over longer periods of time than previously understood. The study clearly shows that 'one size does not fit all' and that the M&A market is indeed more nuanced.”
