More Deals Gone Bad
August 13th, 2010Interesting article at Bloomberg today about the recent vintage of under-performing M&A deals (see M&A Losers, ht Donald).
More than half of the 100 biggest takeovers made during the last mergers-and-acquisitions boom have something in common: By one measure, they never should have happened.
The stocks of 53 companies that made the biggest purchases from 2005 to 2008 lagged behind industry peers two years later, according to data compiled by Bloomberg’s ranking group. Among the worst performers were McClatchy Co., Boston Scientific Corp., and Sprint Nextel Corp., all three of which are now valued at less than the price they paid for their acquisitions.
Companies struck $10 trillion of deals during the last merger binge, even after more than a decade of research showing deals often don’t pay off for the buyers. The average stock price of all the top acquirers trailed benchmark indexes by an average of about 3 percentage points.
I’ve written a fair amount about how difficult it is to acquire successfully (see Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, and The Complexity of Strategic Acquisitions). That notwithstanding, what never ceases to amaze me is that although we know, and have known for quite some time, that deals generally under perform and that most fail, we continue to repeat our mistakes.
Are managers incapable of learning, …or are the incentives to acquire so perverse that they just cannot resist??
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August 14th, 2010 at 11:07 am
SprintNextel was obviously a terrible idea and I’m sure many of the others were as well, but we shouldn’t ignore the possibility that many of these firms would have been even worse off had they _not_ acquired. This would be consistent with the research on diversification. Companies with poor prospects in their core markets diversify, rather than diversification causing poor performance. Couldn’t the same be true of acquisitions? Hmm, that sounds like a good idea for a paper…
August 14th, 2010 at 2:28 pm
Good point Acquisitive. And that view is certainly consistent with the academic work of Campa & Kedia and Villalonga. It’s difficult to know what would have happened to a particular firm had it not gone through with the acquisition (we don’t get to observe the counter factual). And certainly this is what makes it difficult to assess the ex post performance of any deal.
That said however, my understanding is that the Campa & Kedia and Villalonga work is limited to diversification events (trying to explain the diversification discount). That work does not necessarily speak as much to related acquisitions. So yes, could be an interesting paper in there. However, I think the work on agency suggests that there are some perverse managerial incentives to acquire that benefit managers but not shareholders.
And if you buy into the EMH (in some form), then even if it’s better for the focal firm to diversify instead of die (an agency problem) as in Campa and/or Villalonga, it still might be better for perfectly diversified shareholders for that firm to die instead of having diversified.
September 28th, 2010 at 6:33 am
I think M&As are (to paraphrase Samuel Johnson’s view on a second marriage), a triumph of hope over experience.
As you’ve said the weight of empirical evidence is overwhelmingly against major M&As. To say it somewhat less kindly, large acquisitions are driven less by genuine business logic and more by ego or intentions of camouflaging troubles elsewhere.
Small, targeted acquisitions to acquire specific expertise, markets or customers may however still be a good way to go however.
April 13th, 2011 at 10:11 am
[...] the overwhelming majority of strategic acquisitions fail to create value for shareholders (see also More Deals Gone Bad, Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, and The Complexity of [...]