In Hard Times M&A's Return Doubles
Financially sound companies shouldn't miss the opportunity given by these times of economic uncertainty to grab double excess returns through M&A deals.
A research by Stefano Gatti and Carlo Chiarella in association with Goldman Sachs, presented today at Università Bocconi, analyses 1,248 M&A deals, worth on average € 1 bln each, concluded in Europe from 2001 until 2012, in which both bidder and target were listed companies. The 348 deals concluded in the crisis periods following the burst of the tech bubble in 2002, the burst of the real estate bubble in 2008 and the explosion of the sovereign debt crisis in 2011 obtained more than double excess returns in comparison to the 900 deals concluded in normal times. 180 days after the deal, the shares of acquiring companies beat the market by 2.62% in quiet times and by 5.34% in crisis periods.
The result poorly matches the observation (confirmed by the data collected for this research) that in uncertain times the number of M&A deals steeply decreases. On the one hand, economic turmoil makes the evaluation of target companies difficult, bidders' experience in the same kind of deals less useful and the post-integration phase more complex. On the other, hard times are a window of opportunity for the best buyers, i.e. financially sound companies with much cash and strong negotiating power, which can choose only the best targets.
The two scholars also observe that the features of the deals in times of turmoil don't substantially differ from normal times. The only differences are the fall in the value of hostile takeover deals and a larger use of stocks, instead of cash, as a means of payment, even if it forces the bidder to pay a higher premium.
The data about the number and the value of the deals concluded from 2007 until 2012 highlights that American, Japanese and Asian companies have reacted to the uncertainty and, after the generalized fall between the end of 2008 and the beginning of 2009, have absorbed the shock and are on the market again. European companies are instead missing the opportunity to grow via M&A: in the third quarter of 2007 Europe's share of the M&A market was 42%, in the fourth quarter of 2012 it had crumbled to 21%.