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Companies with a long history of M&A may want to think twice before acquiring again; a new report finds that on average, serial acquirers create less value during deals than infrequent acquirers.
Marielle Segarra, CFO Magazine
July 15, 2011
With substantial stores of cash on hand, companies continue to toss more money into mergers and acquisitions. The total value of M&A has jumped by 39% this year compared with this time last year, although the number of deals is down, according to a recent tally by PricewaterhouseCoopers.
But serial acquirers eager to snap up new targets may want to think twice. Boston Consulting Group (BCG) research suggests that, contrary to popular belief, such companies may be at a disadvantage: practice does not necessarily make perfect when it comes to M&A.
Of 26,000 companies evaluated, serial acquirers saw 0.3% average returns on their deals — a significantly lower percentage than infrequent acquirers, which earned 1.5%. But not all serial dealmakers lagged their less-experienced peers. Rather, serial acquirers fell into two distinct camps: half of them averaged returns of 2.3%, and half saw returns of -2%.
What makes some serial acquirers so successful? For one thing, they apply their experience to complex deals that demand M&A expertise, says Jens Kengelbach, principal at BCG in Munich. They also succeed by focusing on distressed targets, which have proven particularly value-creating for experienced acquirers, producing 1.4% higher returns for them than for novice buyers. Serial acquirers also earned much greater returns from buying relatively small companies than they did by acquiring larger companies. And serial acquirers created positive returns when they made acquisitions abroad.
Less-successful serial acquirers may have been more focused on building empires than creating value, Kengelbach says. He suggests that these companies may have experienced "diminishing returns" because they went for growth over quality, gobbling up all the targets they could without appropriate deliberation. Since these companies put themselves "under the pressure of 'growth at any price,'" they may have been "overpaying in a bidding situation where they would normally step away," Kengelbach says.
These companies may also have seen low returns because their shareholders got fed up with their strategies, Kengelbach says. If investors prefer to see organic growth or increased dividends, a string of endless acquisitions could make them flee, says John Graham, professor of finance at Duke University's Fuqua School of Business. "If [investors] think that managers are mainly concerned with preserving their empires and keeping their jobs, and therefore likely to just buy everything in sight," Graham says, "at some point those investors might say, 'We're out of here; we don't really want to take part in this strategy.'"
Kengelbach says all acquirers — seasoned or rookie — can heed two pieces of advice: time deals strategically, and go abroad. The BCG report found that acquisitions created the most value when they began at the start of a wave, when deal premiums and competition are lowest. Acquisitions in other countries also created positive returns, especially for serial acquirers buying in the later phases of an M&A wave.