Monday, December 13, 2010

Acquisitions – finally something to cheer about…?

Decades of research scarily consistently shows that most acquisitions destroy value, and only cost the acquirer money. There is really no denying it – all “ifs” and “buts” have been raised, examined and rebutted – about 70 percent of acquisitions fail. That is because acquirers are usually inclined to overpay (under pressure from bankers, the press and their own adrenaline; a take-over premium of 60-80 percent is really nothing unusual) and because managers systematically overestimate their potential for value creation; integration is often much harder to pull off than one thinks and “synergies” carry you only so far. So far the (familiar) bad news.

Slightly to my surprise though – although not unwelcome – over the past years a few studies have emerged that managed to identify categories of acquisitions which on average do create surplus value. And the first category identified is actually quite a sizeable one: the acquisition of private firms. Pretty much all of the research on M&A is conducted on public firms; that is, firms listed on the stock market. And that is understandable because we simply have much more information on them; because they’re public firms, they more consistently gather and report data and, of course, share price data is available. Hence, we can examine them better.

Professors Laurence Capron from INSEAD and Jung-Chin Shen from York University managed to obtain data on a large number of private deals and, guess what, in contrast to the public deals they examined, these did create some value! Where the take-over of a public target made the share price of the average acquirer fall by about 1 percent; the acquisition of a private target raised it by an average of 4 percent. That may not seem overly impressive to you but it’s really quite a bit of peanuts if you calculate its monetary equivalent – certainly in comparison to the abysmal take-over track record of public deals.

But how come these private take-overs do appear to create some value? Well, that’s a bit of speculation, but Laurence and Jung-Chin had an informed suspicion: information asymmetry. Because, by definition, information about private firms is usually not publicly available, there would also be much fewer buyers aware of the juicy take-over target, and that it was possibly available at a bargain. Consequently, there were fewer bidders and more opportunity for value creation for the eventual acquirer.

Consequently, private deals usually do better than public ones. They might be a bit murkier, hidden and not as glamorous, but hey, they actually make you some dosh!