Analysis of the Wealth Effects of Mergers and Acquisitions with Matthew Brunstrum
After a downturn coming out of the financial crisis, mergers and acquisitions (M&A) activity has rebounded strongly over the past six years, topping $3.6 trillion in deals annually.
The data further showcases the clear connection between M&A activity surging sharply to new highs and the major economic downturns that follow, indicating that stock market bubbles have some telltale warning signs.
Bubbles aside, there are various reasons behind the continuing popularity of M&A deals says Matthew Brunstrum, an M&A Advisor with Sun Acquisitions & MCB Advisory LLC who manages clients with businesses valued between $1 million and $25 million.
He says that several benefits await the acquiring company, as they may gain control over new technologies or other assets, expand their marketing, distribution, and production capacity, gain access to new markets, and instantly add dozens, hundreds, or even thousands of talented employees into the fold.
For the company being sold, there is the obvious financial incentive for the owners and shareholders, who often receive a premium price for their slice of the company based on current estimates of its value. According to Bloomberg data, over 80% of the M&A deals conducted in 2016 had premiums of between 10% and 50%.
And while they may no longer be controlling its rudder, many former owners or employees of acquired companies take great pride in seeing what they started get taken to new heights by bigger companies with the resources to fully leverage their potential.
How Wealth is Generated (and Destroyed) Through Mergers and Acquisitions
As noted, the vast majority of M&A deals paid out at least double-digit premiums to owners and shareholders of the company being acquired, so there is clear value being created in that respect.
However, that doesn’t necessarily mean that those shareholders are always satisfied with their returns, as Matthew Brunstrum notes that they may believe the premium should’ve been higher or that the company would’ve become more highly valued over time on its own.
Nonetheless, target stockholders generally do well, even coming out ahead on average should the merger deal be withdrawn. The same applies to bondholders of the target companies, who enjoy some wealth transfer from the acquiring bondholders and whose bonds are often upgraded from such deals while acquirers’ bonds are more frequently downgraded.
The value creation puzzle is much more complicated for the acquiring company, with KPMG estimating that over half of M&A deals actually destroy some of the acquirer’s value, while another one-third of them do nothing at all, value-wise. Part of that is due to the difficulty of successfully integrating acquired companies says Matthew Brunstrum, which is why so much attention needs to be devoted to all aspects of the merger transaction leading up to its proposal.
Acquirers may be penalized by the market for a range of factors related to any M&A deal, including the price paid, the amount of synergies created by the deal, and the method of payment and resulting debt load. The shares of firms that make tender offers do far better five years out than those which make merger bids, while those paying in cash also do much better than companies which pay in stock.
Other factors also impact the value creation of M&A deals, including the location of the target company. An analysis of M&A deals found that when companies in emerging markets were the targets of a deal, they received far lower premiums and less of the overall wealth generation despite their deals otherwise creating the same amount of value.
Thus, Matthew Brunstrum believes American companies can do very well for themselves by targeting emerging markets companies that may have less bargaining power than similar-sized American counterparts.
