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Empire state

28 May 2015 By Jeffrey Goldfarb

It’s better for most to admire the virtuosi of M&A than to try and replicate their feats. A new study suggests corporate wheeler-dealers generating strong returns use risky acquisition tactics. Plenty of research, though, shows that most acquirers struggle to add value. Chief executives would do well to recognize their limits before building empires.

Nearly 1,500 publicly traded companies around the world consistently produced higher total shareholder returns while actively buying and selling other firms than some 23,500 peers, according to the analysis conducted by Intralinks and London’s Cass Business School. The top class includes Google, Linn Energy, SABMiller, Teva Pharmaceutical and Softbank.

Companies that do well in the merger game purchase more than three times as much as they offload in terms of value, according to the report. By comparison, others have a one-to-one ratio, perhaps indicative of CEOs shuffling their businesses without a clear plan. Better performers also do four times as many hostile deals, although the proportions are small – 0.8 percent versus 0.2 percent of transactions. And they make all-cash purchases 38 percent of the time compared to 30 percent for other companies.

The so-called “Masters of the Deal,” as the report is titled, buy companies that are relatively small compared with their own size rather than targeting bigger quarry that can prove hard to integrate. And when they sell, a greater volume of assets go to overseas buyers than is typical. That could mean the masters are better at scouring the globe for suitors willing to pay up.

In some ways the findings defy conventional wisdom, which says that most deals don’t create value for acquirers and that aggressive maneuvers are a particularly reliable recipe for disappointment. More likely, though, they simply underline that only the best practitioners of M&A make a profitable fist of it long-term – and that they have room to take risks and make mistakes others can’t afford.

The danger is that ambitious CEOs and boards take the research to mean they can add more value if they do more aggressive deals. That would confuse the cause and effect. Any attempt to mimic the most capable acquirers by embracing a bold M&A strategy would be a mistake. This study is more a warning than a blueprint.


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