BOSTON, MA--(Marketwire - August 15, 2007) - One of the largest-ever studies of mergers and
acquisitions (M&A), conducted by The Boston Consulting Group (BCG),
identifies several trends that will continue to drive high deal flow,
albeit at a reduced rate, through current volatility in the global
financial markets.
The study, published in a new BCG report entitled "The Brave New World of
M&A: How to Create Value from Mergers and Acquisitions," is based on a
detailed analysis of more than 4,000 completed deals between 1992 and 2006.
It is believed to be the largest nonacademic study of its kind.
"We are seeing a return to normalcy, which is healthy," said Jeff Gell, a
Chicago-based partner and coauthor of the report, upon its release. "Prices
and leverage will come down slightly, but volumes will remain high as the
strategic need for most deals is still present. Companies are still sitting
on excess cash that they need to deploy, and private equity funds still
have large war chests that they need to put to work."
Among the major trends identified:
Global Consolidation Is Accelerating
-- Consolidation deals as a portion of the total value of transactions
leapt from 48.7 percent in the period 1999 to 2000 to 71.4 percent last
year. Globalization, more liberal regulatory environments, and ample funds
for M&A will continue propelling this trend.
Private Equity Is Playing a Growing Role
-- Private equity firms' share of the total value of transactions has leapt
from 6 percent to 24 percent (1996-2006). In absolute terms, the total
value of PE deals soared from $160 billion in 2000 to $650 billion in 2006.
Developing Markets Are Helping Fuel the Boom
-- The Americas account for the largest share of deal value (46.5 percent),
but Europe has drawn closer (29.5 percent). Between 2002 and 2006, China's
and India's deal value grew by 20.4 percent per year.
The study also explodes a number of myths about M&A. Among the contrarian
findings:
Private Equity Is Winning by Paying Less
-- It's commonly assumed that PE firms have gained an increasingly large
share of the M&A market by using their huge reserves of capital to pay over
the top for targets. But BCG's analysis indicates that, on average, PE
firms pay lower multiples and lower acquisition premiums than "strategic"
buyers. One of the reasons why PE firms appear to pay less, on average, is
that they tend not to bid for targets in industries where there is strong
consolidation logic and where high multiples are commonly paid, so their
average multiples are less influenced by large, individual multiples than
those of strategic buyers.
Higher Acquisition Premiums Do Not Necessarily Destroy Value
-- Between 1992 and 2006, value-creating deals had a 21.7 percent premium,
on average, compared with an 18.7 percent premium for non-value-creating
transactions. Paying higher premiums appears to be especially valuable
during periods of heightened activity (such as now). Acquirers that pay
larger premiums have destroyed less value during these periods.
Bigger Isn't Necessarily Better
-- Deals over $1 billion destroy nearly twice as much value on a percentage
basis as deals below $1 billion. And deals destroy progressively more value
as the size of the target increases relative to the size of the acquirer.
Targets worth more than 50 percent of the value of the acquirer destroy
twice as much value on a percentage basis as targets worth less than 10
percent of the acquirer.
It Doesn't Always Pay to Be Friendly
-- Hostile deals are viewed significantly more favorably by investors in
today's market than they were in the preceding wave of M&A (1997-2001).
This could be because most deals since 2002 have been consolidation
mergers. Establishing a harmonious relationship with the target tends to be
less important in this type of M&A because the primary goal is usually to
realize cost synergies through rationalization, as opposed to growth
synergies by teaming-up capabilities.
M&A Often Creates Substantial Value
-- Although 58.3 percent of deals between 1992 and 2006 destroyed value for
acquirers, with a net loss of 1.2 percent for all transactions, the average
deal produced a net gain to shareholders of 1.8 percent when returns of the
targets are taken into account. Moreover, the majority of deals (56
percent) created value for the combined set of shareholders. In addition,
acquirers in several industries, including automotive and retail, created
value, on average, as did acquirers in the Asia-Pacific region.
Cash Is King
-- Cash-only transactions have a much more positive impact on value than
deals that rely on stock, a mix of stock and cash, or other payment
contributions.
The authors point out that in today's M&A environment, sitting on the
sidelines holds risks as well. It not only exposes a company to the threat
of a hostile bid, it also gives rivals the opportunity to snatch prime
targets and gradually erode the company's competitive position.
"In consolidating industries, joining the brave new world of M&A may be the
only way to survive -- eat or be eaten," said Alexander Roos, a
Berlin-based partner who coauthored the report with Gell, Kees Cools in
Amsterdam, and Jens Kengelbach in Munich. "To avoid becoming prey,
companies need to raise their game and adopt a much more professional and
systematic approach to M&A."
Among the authors' recommendations:
-- Professionalize M&A like any other industrial process, with a strong
strategic logic and a rigorous post-merger integration, formulated before a
deal is concluded
-- Conduct a high-resolution valuation of prospective targets, including
assessing the costs of not doing a deal
-- Learn from private equity, including the possibility of leveraging up
with greater debt
To receive a copy of "The Brave New World of M&A," or to schedule an
interview with one of the authors, please contact Eric Gregoire at + 1
617-854-4570 or gregoire.eric@bcg.com.
About The Boston Consulting Group
Since its founding in 1963, The Boston Consulting Group has focused on
helping clients achieve competitive advantage. Our firm believes that best
practices or benchmarks are rarely enough to create lasting value and that
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For further information, please visit our Web site at www.bcg.com.
Contact Information: Contact:
Eric Gregoire
+ 1 617-854-4570