More Deals, More Failures
Pricing an acquisition correctly is extraordinarily important
given how many deals there are — and how many fail. During the
past decade, merger and acquisition activity has steadily
increased, as measured both by the total number of deals and by
the value of those deals. In 1998 alone, 20,448 deals were
completed worth a total of $2 trillion.
The prognosis for most of those deals is not good. Several studies covering MSA activity in the past 75 years have concluded that well over half of mergers and acquisitions failed to create their expected value. In many cases, value was destroyed, and the company's performance after the deal was significantly below what it had been before the deal. The success rate is not much better today than it was 75 years ago, despite numerous, well-publicized studies illuminating the high failure rates.1
The executives who continue to make bad deals don't appear to have learned much. The equity markets, by contrast, have learned from experience. Building on research done by Mark Sirower, we studied 131 deals, each valued at $500 million or more, that took place between1994and 1997 in the United States, Europe, and Asia. Our analysis, consistent with Sirower's earlier study of U.S. companies, shows that in 59% of the deals, the total market-adjusted return of the acquiring company went down on announcement.2 That means the market thought the deal would destroy rather than create value for the shareholders of the acquiring or merged company. Returns for 71% of those deals were negative over the next 12 months. By contrast, of the 41% of deals where the total return went up on announcement—in other words, where the market expected value to be created—55% still had positive returns in the ensuing year. This analysis demonstrates both that most deals do not create value and that the market is fairly good at predicting which ones will and which ones won't.
1. For a good summary of these studies, see
Dennis C. Mueller, "Mergers: Theory and Evidence," in
Mergers, Markets and Public Policy, ed. G. Mussati (Kluwer
Academic Publishers, 1995 ).
2. Mark Sirower, The Synergy Trap (The Free Press, I997)
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