Smaller Mergers Outdoing Mega-Deals

After 18 months, medium-sized deals deliver greater value than mega-mergers.
Stephen TaubDecember 7, 2006

The recent wave of mergers and acquisitions as a whole have spawned immediate value for shareholder in a way that M&A deals didn’t in previous decades, recent research on M&A performance suggests. But medium-sized transactions are delivering more long-term worth than multi-million deals are producing.

The research–conducted in two phases by Towers Perrin and London’s Cass Business School–looked at the financial performance of 1,500 deals six and 18 months after they were completed. The study looked at deals done in the merger waves of 2005, 2004, 1998, and 1988.

For the first phase, researchers studied data from global M&A deals with an inflation-adjusted value of between $400 million and $1.5 billion, tracking performance over the six months after the announcement of each deal. Over that time period, transactions occurring in 2004 outperformed the global Morgan Stanley Capital International (MSCI) index by 7 percent according to the study. By comparison, deals in 1998 underperformed by 3 percent over a similar time frame, while deals that occurred in 1988 fell off by 6 percent.

In the second phase, researchers reviewed the performance of 2004 deals (both medium and larger (those over $1.5 billion) over an 18-month period after close, as well as the performance of 2005 deals over a six-month period after close. They found that 2005 deals continued to outperform the market over the longer, unlike deals in the prior waves in 1998 and 1988.

The study also found a clear difference between mid-range deals and bigger ones. To be sure, mega-deals were successful six months after they’re completed, out-performing the stock market by 13.8 percent. After 18 months, however, that margin slimmed to just 1.1 percent. Over the same period, medium-sized deals of time outperformed the market by around 7 percent.

The research “confirms that M&As are now delivering value well beyond the initial six-month period,” said Marco Boschetti, principal and a leader of Towers Perrin’s M&A consulting practice, in a press release. “While the M&A community may assume that big is beautiful, our findings suggest that the benefits of large transactions may be short-lived. The mega-deals seem to lose their appeal somewhere between the six and 18 months following the deal’s consummation.¨

The most significant reason for this phenomenon, he says, is that large deals have major implementation challenges, including the integration of different cultures and employee retention and attraction.