Strategic Corporate Finance: Applications in Valuation and Capital Structure

TRANSACTIONS THAT CREATE VALUE

For a host of reasons, many M&A deals are unsuccessful. But many do create tremendous value. Our objective is to understand how to incorporate M&A as part of a growth strategy to meet the value imperative. We hope to ensure the ingredients of success are incorporated at the outset of an M&A process.

Interestingly about one half of all deals have positive excess returns in the short term and about one half exhibit positive excess returns for the longer term. However, the outcomes are widely dispersed—the averages are hardly meaningful—and longer-term outcomes are more dispersed. Short-term outcomes are not as widely dispersed as longer-term outcomes but tend to be the focus in the literature because the impact is more isolated from the influence of other unrelated factors. Their usefulness is of course, predicated on a semi-strong form of market efficiency—we assume the market provides our best independent assessment of the transaction and incorporates these expectations into market prices—and the net present value (NPV) of the impact is capitalized into share price. Similar insights are often evident in both horizons because the populations overlap and short-term success tends to be correlated with longer-term success. We and other researchers have found short-term returns to be reasonably consistent with longer-term returns.2

Most short-term excess returns narrowly clustered within a range of between +/−5 percent; longer-term excess returns are widely ...