The annual Mergers, Acquisitions & Buyouts Conference is the showpiece of the Vlerick Centre for Mergers, Acquisitions and Buyouts and a key event for everyone working in the sector. The tenth edition was another resounding success. Professors Mathieu Luypaert and Miguel Meuleman extracted ten important insights from over a decade of research. We discuss them here, for those who were unable to attend. Here, in the first part of our report, we talk about the five things we have learned about mergers and acquisitions. In the second part, we will turn our attention to the five things we have learned about buyouts financed by private equity.
Mergers and acquisitions have a bad reputation: they are said to destroy value. For years, the headlines of renowned publications told us that 70–90% of all transactions fail. After the announcement of an acquisition, the acquirer’s stock price drops by an average of 1%, while that of the target rises. At least, that was the case for transactions before 2010. More recent research shows that the yield for acquirers has increased since then, as has the yield for the targets. When they announce an acquisition, acquirers increase in value by an average of more than 1%. The big win is for the targets, which grow in value by an average of 30%. Because acquirers expect synergies, they are willing to pay more than the standalone value of the target. The premium they pay on top of that standalone value should be enough to convince the seller, but it must not exceed the value of the synergies, because then the acquisition would make a loss. In practice, the bid price is usually close to the upper limit of the price range, which explains why the bulk of the value created benefits the target. Incidentally, the acquisition of non-listed targets tended to be positive for acquirers even before 2010. So it is high time to do away with the notion that mergers and acquisitions do not create value.
A common objection is that takeovers typically entail layoffs and pay cuts. In the 1980s, takeovers did often lead to layoffs, but that is an outdated image now. Research into European acquisitions has shown that acquired organisations experience growth in employment up to 10 percentage points stronger than organisations that have not been acquired by another company. Studies also show that pay does not fall after an acquisition. The transactions in which pay is increased are the ones that create the most value. This is hardly surprising if you consider that, in the war for talent, attracting strong profiles has become an important driver for mergers or acquisitions. This also applies in the Belgian context, as shown by our annual M&A Monitor.
The market for mergers and acquisitions is subject to huge fluctuations, with periods of increased activity in a wave pattern. All the records were smashed in 2021, with acquisitions worth more than 6,000 billion dollars worldwide. However, studies warn that transactions that take place during a wave typically perform less strongly than those at other times. Transactions at the beginning of a wave perform less poorly than those at the peak. There are various explanations for this. When the economy is doing well and companies have money to spare, they may be less careful when assessing potential synergies. Because everyone is in buy mode, the CEO will not be as fiercely criticised for a bad acquisition either. Last but not least, the law of supply and demand plays a role: when there is a high demand for targets, the price rises, and it becomes more difficult to make a profit out of a transaction.
Apparently there is no such thing as a company that is good or bad at making acquisitions. However, some CEOs are good at acquisitions, while others are not. Acquisitions by CEOs with experience in the target's sector outperform acquisitions by CEOs who are unfamiliar with this sector by up to 2 percentage points. However, acquirers would do better to avoid narcissistic CEOs. The more a CEO uses singular pronouns such as I, me or myself, the greater the degree of narcissism and the poorer the performance after acquisition. What about the impact that CFOs have? Influential CFOs select better targets, negotiate a lower price, ensure that the transaction is settled more smoothly and generate better operational performance in the long term. As for the acquirer’s board of directors, a study by Vlerick has shown that the most important factor that positively influences the result of the acquisition is the number of independent directors. The size of the board of directors and the number of foreign directors has no impact at all, and a diversity of gender and age only has a marginally positive effect. A CEO who also acts as the chair of the board of directors, however, will have a negative influence on the value.
Does the choice of investment bank affect the results of a transaction? Yes, research has shown that it does. Furthermore, the difference between a good and poor performer is significant. However, research has also shown that it is not so much the bank that determines whether a transaction will be successful as the individual banker. So the acquirer’s choice should not be guided by the reputation of an investment bank or consultancy firm, but by the background, knowledge and skills of the person who will actually be advising them on the deal. Incidentally, good advisors are not necessarily large organisations. Smaller firms – boutique advisers – can sometimes perform better. This is true of small transactions or complex cases in very specific sectors, for example. Moreover, it can also be useful to follow the example of PE companies. This is because acquisitions of targets that have been financed by PE in the past achieve better results.
Dittmar, A., Li, D., & Nain, A. (2012). It Pays to Follow the Leader: Acquiring Targets Picked by Private Equity. Journal of Financial and Quantitative Analysis, 47(5), 901-931.