M&A's Losing Hand

It's been an absolutely ugly October in global financial markets, and all indications point to continued uncertainty and volatility for the foreseeable future. Most CEOs and CFOs of public companies are looking dejectedly at company share prices that are a fraction of what they were just a year ago. For companies that are weathering the current storm, the question that progressive CEOs and CFOs will soon begin to consider, as they should, is, Where do we need to take our business in order to begin delivering shareholder value and returns once again?

Considering this question will require the crafting of a compelling narrative and strategy that these senior leaders can communicate to their employees, customers, and shareholders about what's next -- e.g., where is the company's future profitable growth going to come from?

One of the often-used vehicles to achieve growth, in theory, has been mergers and acquisitions (M&As); however, current market conditions make M&As a dicey or even impractical option. The unavailability of credit and increasingly expensive short-term refinancing rates, coupled with the economic downturn and depressed equity prices, have all served to make M&As difficult to accomplish. This has resulted in a spate of dead deals in recent weeks.

According to Deal Logic, the first 13 days of October witnessed 49 deals valued at $57.6 billion pulled, after $62.8 billion worth of deals were pulled in September. Acquirers that were hit by M&A travails include the BG Group, Waste Management, Bristol-Myers Squibb, HSBC Holdings, Dubai World, Xstrata, and Walgreen, to name a few. From this list, it is obvious that the M&A downturn is hitting companies in a diverse array of sectors, industries, and geographies.

How should CEOs, CFOs, and shareholders react to the M&A malaise? Contrary to popular belief, and especially so for those considering a large M&A transaction, they should pop open a bottle of champagne and celebrate. Why? Because according to our research, "megadeals" -- those in which the target's value exceeds $10 billion -- more often than not destroy shareholder value.

This is the underlying conclusion of our study in which we evaluated all megadeals from 2002 to 2007. We examined 33 M&A megadeals from Europe, Canada, and the USA in which the acquirers were strategic buyers -- not financial or private equity concerns. (Please note that because some data was unavailable, in some instances our results do not reflect all 33 deals; see the sidebar to get a list of the evaluated deals.)

In what was arguably one of the greatest bull markets we've ever seen, we observed that megadeals actually destroyed value over 60 percent of the time. On average, transactions resulted in negative cumulative excess beta returns (--4.03 percent) in the year after their announcement. (See the sidebar for insights into the research methodology.)