“…Among Russell 3ooo firms with acquisitions greater than 5% of acquirer enterprise value, post M&A acquirer returns have underperformed peers in general.”
This quote from a recent S&P study says it all about how careful an investor has to be about M&A – particularly from the acquirer’s point of view. S&P’s conclusions about M&A have outsized implications right now because of the high cash levels (much of it financed by debt issuance) in the corporate world. Structural issues abound in the M&A space because these transactions create perverse incentives for managers. Deals get done for the wrong reasons and at the wrong prices.
Interestingly, and worth your reading time, S&P has done an interesting thing – used their analysis to separate good acquisitions from the bad.
- Stock based acquisitions underperform those based on cash.
- Large scale acquisitions often underperform.
- High pre-acquisition cash balances bode negatively for post-deal stock performance.
As intelligent investors, you can likely surmise some of the reasons behind these factor analysis-based conclusions. Every deal is indeed different, but the point here is that, as a shareholder, it pays to be skeptical.
In the meantime, Invest Intelligently…