Not many CFOs have specialized corporate development teams to turn to when hunting takeover and merger targets. Indeed, a little more than one-third (37%) of publicly held U.S. companies had specialized M&A staffs between 2000 and 2017.
If your company can afford it and has designs on building through takeovers, though, these teams may be worth it. Or are they?
A new study, Do Firms With Specialized M&A Staff Make Better Acquisitions? definitely comes down on the side of having a dedicated M&A team, but that’s not an unqualified finding. In other words, don’t rush out and build one.
Specialized M&A staff are involved in all aspects of the acquisition process including, but not limited to, development of a firm’s inorganic growth strategy; identification of targets from internal pipelines and information memorandums sent by investment banks; performing synergy and valuation analyses on transactions; participating in deal negotiations with the target; undertaking financial due diligence; analyzing post-merger integration; and comparing post-deal outcomes to pre-acquisition forecasts.
Analyzing 11,098 acquisitions totaling $6.4 trillion of deal value over the 17 years, the authors — Sinan Gokkaya, associate professor at Ohio University; Xi Liu, assistant professor of Miami University; and René M. Stulz, chair of banking and monetary economics at The Ohio State University — found that, on average, firms with specialized M&A staff make better acquisitions.
“Better” is measured by shareholder wealth creation around acquisition announcements, long-term stock returns, changes in long-term operating performance, and changes in consensus analyst earnings forecasts around acquisitions.
In terms of performance measures, in particular, firms with specialized M&A staff 1) are less likely to divest acquisitions, 2) have their consensus analyst earnings forecasts increase more following the acquisitions, 3) have their abnormal operating performance improve more in the post-acquisition period relative to the pre-acquisition year, and 4) are less likely to make an acquisition with a significant shareholder wealth loss.
How do M&A teams help create value? The results suggest that a specialized M&A staff helps an acquirer identify targets that have higher synergies. Translation: they are most useful when put to work combing through information on potential deal targets.
Specialized staffs do not appear to help acquirers capture more synergies from targets. And there is no evidence that firms with specialized M&A staffs pay less for a target company.
However, past the targeting stage, all bets are off. Specialized staff does not appear to help acquirers capture more synergies from targets. And there is no evidence that firms with specialized M&A staffs pay less for a target company.
“We do not find evidence that specialized M&A staff drives a better bargain for the acquirer in that such acquirers capture more of the combined synergy gains or pay lower takeover premiums,” according to the authors.
In addition, sometimes a specialized M&A staff is just window dressing.
Outcomes are not as good when the company has an overconfident or all-powerful CEO, who is more likely to ignore an M&A staff’s advice, or when management is focused on “empire building through acquisitions to extract private benefits rather than maximizing shareholder wealth.”
Not all M&A teams are equal, even if the two conditions above are not present. Specialized M&A staff supervised by more experienced corporate development managers add even more value to acquisition performance, the study finds.
So why don’t all companies employ such teams?
Specifically, CEOs with longer industry experience, experience in the target’s industry, or investment banking experience are less likely to employ M&A teams. Firms with directors possessing such specialized knowledge are likewise less likely to have specialized M&A staff, consistent with the notion that CEOs may rely on such directors for acquisitions, the authors say.