Insights on M&A transactions; completed vs. abandoned

Mergers and acquisitions, or M&A as usually referred within the community and array of practicing experts, provides companies and corporations additional value creating opportunity searching for growth, competitiveness and ultimately value for shareholders.

While a lot of research and studies has been conducted to assess performance and success of M&A activity, SS&C Intralinks together with Acuris Studios provided an interesting and different insights on M&A transactions. Mark Mua from SS&C Intralinks gave last week a presentation in Nordic M&A Private Equity forum in Stockholm on "Abandoned Acquisitions 2.0". Mark's presentation was loaded with data and background from M&A transactions around the globe over 30 years of deals announced and completed or withdrawn i.e. abandoned.

We engaged in discussions with Mark to review the report and found some interesting insights to be considered. The report and its findings are too extensive to be fully covered here but we feel compelled to share some aspects and provide insights to our community and clients. We are happy to discuss our views and recommendations should you or your company contemplate the impact on M&A as a strategy for growth, financial performance and shareholder value creation.

Observation A - Shareholder value creation

M&A activity is almost always about creating value, one way or the other. Acquisitions are entered with a solid belief that the deal will deliver shareholder value, with varying elapsed time after completion. As expected the research revealed that successful bids are creating shareholder value, up to 3-4% across the globe, while abandoned deals struck a value decrease of 6-10% varying per industry; value measured as change in share price.

Regional and sectoral differences provided additional insight. Successful deals provided most increase in value in the Asia-Pacific (APAC) up to 11.6%, Latin America (LATAM) coming second with up to 11.6% increase. The Europe, the Middle East and Africa (EMEA) deals were more modest, resulting only 4,0% increase. Withdrawn or abandoned deals destroyed value the most in APAC, sending share price down 15-16% depending on elapsed time after abandonment (12 / 24 / 36 mo.). North American companies abandoning deals were also heavily hit, down 16,7% after 36 months. EMEA counterparts faired much better, value was in some cases not destroyed at all, quite the opposite, some increased up to 5,3%.

Observation B - Impact on further deal activity

In brief, when it comes to impact on deal activity following completing or abandoning a deal, it can be stated that success breeds success. Winning becomes a habit and size does matter. Furthermore, if you fail by abandoning a deal, you are twice as likely to become targeted to be acquired. This is also where performance, reputation and resilience matters the most, providing credibility and trust going forward.

Failed companies, and their deal teams fall under financial stress and psychological strain from their sponsors, shareholders and not the least competition. As one M&A advisor puts it:"Unsuccessful bidders lose their competitive edge and if they are not able to undertake another successful deal quickly enough, shareholders will question their ability to generate returns".

Observation C - Leadership on the line of fire

M&A transactions are one of most challenging situations management and CEO's in particular get into. Deals completed or abandoned impact any company for number of years and thus takes toll for all the parties involved. The research provides somewhat ambiguous findings on CEO's longevity and compensation. It was not surprising that 14% of CEOs moved on, i.e. were changed, within 12 months when deals were not successful. Furthermore, close to 32% had moved on within 36 months after abandoned deals.

Compensation findings were on in line with staying in top job. CEO compensation was increasing all across the line regardless of time elapsed after deal completion or abandonment; this has been found to represent new and probably more experienced (and expensive) CEO after past deal making performance gone south. Bottom line, shareholders respond to performance, change CEOs to get deals done. Thereafter new CEO and deal team is under pressure to perform better. Very clear message how important winning is.

Observation D - Deal type performance expectations

There are various types of M&A deals depending on how you look at them. The focus was on cross-border vs. domestic, cross-industry vs. same industry and pricing characteristics on a deal. Most evident finding was on the punitiveness of failing a domestic transaction. It was found that domestic deals were deemed more simple, therefore tolerance for withdrawal is minimal. Furthermore larger price premium deals, when abandoned are tolerated more amicably. Additionally, privately-owned target acquisitions are expected to be completed with success and value delivered faster than in cross-border deals. Here again performance is judged according market situation, deal characteristics and level of challenges expected.

Summary - Going forward in turbulent times

Hopefully these insights from M&A transactions, particularly on acquisition perspective, give food for thought and inspires to dig deep and fine tune your value creating deal strategies. Based on the research and report findings, we see an overarching theme to design your growth strategy using M&A diligently, harness new capabilities to tackle various challenges along the way and get you chosen deals done using structured but agile approach. Current markets offer active and prepared companies lot of acquisition opportunities to create shareholder value. Enough said now, but we will later post our take on how to sort out your acquisition strategy, obtain new capabilities and execute with greater success.