2. Do Mergers and Acquisitions Create Shareholder Value?
Although evidence clearly indicates that the shareholders of a target profit from a merger or acquisition, the same cannot be said for the shareholders of the acquirer. An abundance of studies show that the share price of almost all targets increases around the announcement of a merger or an acquisition. However, the share price of acquirers rarely follows the same trend; the average share price performance of acquirers around the announcement of a merger or an acquisition is slightly negative, and acquirers commonly experience a significant decrease in share price after announcing their intention to merge with or acquire another company. Kengelbach and Roos, from the Boston Consulting Group (BCG) (2011), studied approximately 26,000 transactions completed between 1988 and 2010. They showed that the average share price performance over a seven-day window centered on the announcement date was 15.5 percent for the target but –1.0 percent for the acquirer. The study revealed that acquirers perform better if they purchase a foreign target instead of a domestic one, if they pay in cash rather than in securities or a mix of cash and securities, if they make only one acquisition, and if the acquisition takes place during a downturn rather than an upturn. A follow-up study by Kengelbach, Kemmer, and Roos (2012) also indicated that some sectors fare better than others. For instance, the share price performance for an average acquirer was 1.9 percent in the manufacturing sector but –2.2 percent in the telecommunication sector.8
This evidence suggests, among other things, that equity markets are skeptical about the ability of acquirers to create shareholder value. Whether offer prices are seen as excessive, the proposed synergies are thought unlikely to materialize, or current management is perceived as incapable of successfully merging two different cultures, equity markets doubt the value associated with most transactions. Sadly, equity markets are correct: Few transactions achieve their anticipated gains. KPMG (2011) analyzed a large sample of M&As completed between January 2007 and July 2009 and showed that, in 44 percent of the transactions, the acquirer achieved either none or very little of the anticipated synergies. Moreover, Kengelbach, et al. (2012), observed that, in 2011, divestitures made up 45 percent of the number of M&As. As mentioned in the vignette at the beginning of this chapter, it is not unusual for companies to end up selling their poorly performing acquisitions.
To help understand why many M&As fail to create shareholder value, it is instructive to consider data on the premiums paid in these transactions. We turn to that topic now.