Strategic Corporate Finance: Applications in Valuation and Capital Structure

CHAPTER 4

Grow: How To Make M&A Pay

Almost all studies of mergers and acquisitions (M&A) show value creation in aggregate. But often the bulk, or even all, of the value creation is found to accrue to the shareholders of target firms while the shareholders of acquiring firms fair far worse. Debate continues on how much less, when, and why. Some research does show that acquiring shareholders also benefit. The equally weighted average announcement return was 1.1 percent or $5.61 of value per $100 invested. However, the dollar-weighted average announcement returns are −1.2 percent.1 Small acquisitions by small firms create value, but large firms make large acquisitions that may produce large losses. Acquisitions in aggregate resulted in losses as large firm losses outweighed small firm gains.

But such studies obscure reality behind the law of averages and provide little actionable advice. And this is not the question to which executives need answers. Despite the mountains of rigorous academic literature on the topic, there has not been a focus on helpful guidance for executives. Though many M&A deals are unsuccessful, for a host of reasons, many do create tremendous value. A more important question for board directors and corporate executives is, “How can we make M&A add value and incorporate it as part of our growth strategy?” How to ensure a win?

We build on the newer research in this area, articulating linkages between key success factors, value creation, and the allocation of ...