Towers Perrin/Cass Business School Research Indicates That Deals Done in Post- Peak Years in M&A Cycles Deliver Greater Value
ChinaHRP Hong Kong, China, May 21, 2008 -- Results from the latest stage of the ongoing Towers Perrin/Cass Business School research looking at the value created in the last three global M&A cycles reveals that, contrary to conventional wisdom, 2008 may be the best time to do a deal.
"This most recent part of the study looked at the performance of companies before and after peak years of the cycles," said Mark Arian, principal and co-leader of the firm's global M&A consulting practice. What it shows is that, on average, over the last two merger waves, deals done in the year following the peak create more shareholder value than those completed during the upswing and peak years of the wave. It appears that 2007 was the peak year of the current merger wave, suggesting 2008 remains a good time to proceed with a deal.
"We know that many organizations are flush with cash, which gives them the reason and resources to buy. Therefore, we expect M&A activity to increase this year, especially among companies that are currently looking for good acquisition opportunities." This latest research demonstrates that a company can grow quickly and deliver significant value for companies through M&A, particularly after a buying peak. "Many Chinese companies are looking to grow their business by making acquisitions including expansion outside their current markets and home countries," said Steve Allan, principal and M&A expert in Asia. However, the difficulties of cross border M&A are well documented with the people and cultural issues often causing significant challenges inthe realization of the target synergy of the deal. "From our experience working on many transactions we have identified the key drivers to successful integration and to addressing the human capital issues that have so often cause deals to fail to live up to expectations."
Notwithstanding the clear empirical evidences and research data, many Chinese acquirers have been reluctant in focusing on the people issues during a M&A transaction. "Many in China believe that one can and should address people issues after acquiring the business, while others believe that one can develop M&A successes by adopting the approach of feeling the stone to across a river, even in a cross border deal. It is important to note that the latest research clearly shows that both mentalities could be detrimental to the M&A success of an organization," added Andy Lee, senior consultant, and M&A expert in Greater China.
Positive performance of post-peak years
The Towers Perrin/Cass Business School study examined the two prior merger waves and found the post-peak years (1990 and 2000) delivered higher shareholder value compared with deals completed in the frenzy of the M&A booms. This was true for all deals, although the research focused on those between $400 million and $1.5 billion in size (adjusted for inflation). Combining the two waves gives a clear and statistically significant picture of performance in pre-peak, peak and post-peak years. Performance in the post-peak years exceeded the Morgan Stanley Capital International (MSCI) World Index by 5.4%, on average, over the two periods.
According to the study, companies have created rather than destroyed value in the current deal wave, in contrast to the prior two cycles. All the evidence indicates this trend will continue, suggesting that the post-peak year in the current merger wave will also add value. "Throughout the recent M&A boom, people have been obsessed by volume, not value. Our research has always focused on the issue we believe is more crucial to shareholders: Has value been destroyed or created? And, if it’s been created, how has that occurred?" said Marco Boschetti, principal and co-leader of the firm's global M&A practice.
"We are all well aware of the many factors that have put the brake on M&A in the current cycle. But with 2007 as the peak year of the current wave, our research indicates that now is the optimal time to do a deal if companies have the means. The evidence from previous post-peak years shows that even when earlier cycles destroyed value in the boom times, the post-peak period was one of value creation."
The Towers Perrin/Cass Business School study started in 2005 to provide a quantitative analysis of worldwide M&A deal success. The first phase of the study compared the first full year of the current merger wave (2004) against prior merger cycles using public data from a number of sources. It was the first study to provide extensive evidence that, unlike prior merger cycles, M&A deals in this wave -- on average -- generated shareholder value and improved financial performance for the newly combined companies.
The studies have examined shareholder value after six and 18 months following completion of the deals. Therefore the most up-to-date research is based on 2006 figures. According to this, deals done in that year, on average, outperformed the market by 9.1%.
"As a result of the research we’ve done, as well as our work on many transactions, Towers Perrin has identified several critical factors for success in a merger or acquisition, and those factors are very much tied to executing flawlessly in the human capital areas," said Arian.
Numerous studies of the M&A cycles that peaked in 1989 and 1999 have shown that M&A transactions, when judged over time, have destroyed value.
"In this climate, more than ever, deals will be scrutinized to see if they deliver value. This analysis should provide some confidence for both corporations that have the ability to do deals today and for their shareholders. Based on our analysis, there is significant potential upside to doing a deal in 2008, a post-peak year, even though it may be even more necessary than ever to select deals carefully," said Scott Moeller, report author and Director and CEO of Executive Education at Cass Business School.
In all nine years covered by the study, a total 38,122 deals were analyzed. Various screens were then applied to be able to carry out like-for-like comparisons. All acquiring companies were publicly quoted, and the deals had to assume 100% ownership of the target asset. The study excluded acquisitions by subsidiaries and joint ventures.
"Our study was the first to identify the significant change in deal success compared to previous cycles. We believe companies have learned lessons from past deals, and seen improvements from better discipline and governance demanded by shareholders. Companies are also paying greater attention to deal execution and addressing people issues that were often previously overlooked," added Boschetti.
The next phase of the Towers Perrin/Cass Business School global M&A cycle study will be completed in the summer of 2008 when the results from 2007, the peak of the current cycle, will be available.
About Cass Business School
Cass Business School delivers innovative, relevant and forward-looking education, training, consultancy and research. Located on the doorstep of one of the world's leading financial centers and with teaching facilities as well in Canary Wharf, Cass is the intellectual hub of the City of London. Our dialogue with business shapes the structure and content of all our programs of study, our executive education programs and our research. Our MBA, Specialist Masters and Undergraduate programs have a reputation for excellence in professional education, and with an MBA ranked 15th in the world by the Financial Times. The school undertakes research of national and international significance and supports almost 100 PhD students. Cass has the largest Finance faculty and the largest actuarial science & statistics faculty in Europe. Our finance research is ranked second in Europe and fourth in the world outside the U.S. by Financial Management Magazine, and our insurance and risk research is ranked second in the world by the Journal of Risk and Insurance. For further information visit: www.cass.city.ac.uk.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, reinsurance intermediary services and actuarial consulting. Towers Perrin has offices and alliance partner locations in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information about Towers Perrin is available at http://www.towersperrin.com.
