Are Acquirers Now Adding Value??
According to a recent issue of Bloomberg Businessweek, acquirers are currently creating value through acquisition (see Markets Love a Buyer, ht Ajay).
Bloomberg analyzed takeovers worth at least $200 million in which the buyer was a public company and no more than 10 times as large as the target. For each transaction it calculated the stock market return from the day before the announcement to the day after, minus the return in a benchmark stock index, to eliminate the impact of broad market movements. Last year the median share price gain for companies that announced an acquisition was 1.11 percent, the most for any full year in the study. So far this year, the figure is 1.18 percent. The worst performance was in 2000, when the median decline was 1.77 percent.
The increase challenges the notion on Wall Street that acquirers are punished for spending money…
Or does it?
As I’ve mentioned on this site many times, over long periods of time, the evidence suggests that acquisitions generally fail to create value for shareholders (see Where Have the Strategic Bidders Gone?, More Deals Gone Bad, Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, and The Complexity of Strategic Acquisitions)
So what gives??
It could very well be, as the Bloomberg Businessweek article suggests, that acquisitions have, on average, created value for shareholders over the past two years. I have not had a chance to evaluate the specifics of the event study methodology the authors use. And I do not dispute the evidence.
Indeed, there is evidence in the literature that under certain conditions, or at certain times, acquisitions generally perform better. For example, literature demonstrates that acquisitions generally perform better when managers of the acquiring company own a greater percentage of the outstanding shares in their company.
The bottom line: Acquisitions do not uniformly destroy value.
In my opinion, therefore, the key take-away from the Bloomberg Businessweek article is that in depressed markets (like we’ve experienced the past few years), there are some real bargains to be had, …and it helps to be a cash rich, counter-cyclical buyer.