Value-Destructive No More, Acquisitions Now Benefit Shareholders


Source: Cormac Mullen from Bloomberg 

It turns out investment bankers may be worth their million-dollar advisory fees after all.

After years of wealth destruction, acquisitions now create more value for acquiring shareholders than ever before, according to a study published in the August edition of the Journal of Corporate Finance.

Between 2010 and 2015, the stock price of a firm acquiring a publicly-listed rival rose an average of 1.1 percent relative to the market in the three days surrounding the announcement, the study showed. That compares with an average relative loss of 1.1 percent in the twenty years from 1990 to 2009, according to the authors, George Alexandridis and Nikolaos Antypas of Henley Business School and Nickolaos Travlos of Surrey Business School.

“To the best of our knowledge this is the first study in at least two-and-a-half decades documenting statistically significant value creation for acquiring shareholders to such extent for a large sample of U.S. public acquisitions,” the authors wrote.

The difference is even greater when measured a month after a deal had been announced. In the two decades to 2009, shares of acquiring firms had underperformed the market by 3 percent 30 days out from the announcement. From 2010 to 2015, that reversed to a 3 percent outperformance.

The paper analyzed 26,078 M&A deals in the U.S. over the 26-year period. The impact of “mega deals,” those above $500 million, seems to be responsible for the upturn, according to the authors. The aftermath of the financial crisis significantly improved corporate governance and fostered “increasingly optimal” investment decisions, they said.

“Our results are consistent with a recent shift in the quality and drivers of M&A deals and point to value creation from large M&As on a great scale,” the academics wrote. “This contradicts the status quo that such type of acquisitions destroy value more often than they create.”

Deals worth $1.5 trillion were announced globally in the first half of 2017, a decline of 2 percent from the same period last year, according to data compiled by Bloomberg. In the U.S., $815 billion of deals were announced, a drop of 7.6 percent, the data show.

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