. 2022. Mark L. Sirower and Jeffery M. Weirens. Harvard Business Review Press.
“Poorly planned and executed acquisitions have almost certainly destroyed far more investment value than fraudulent actions by management.”
Investors who remember massive fraud-related wealth destroyers like Enron, HealthSouth, and Parmalat may wonder if this statement is accurate. Authors Mark L. Sirower And Jeffrey M Weirens But back up their claim with examples like insurer Conseco’s ill-fated, all-stock acquisition of subprime mobile home lender Green Tree Financial in 1998. A yr after the deal was announced, Conseco stock fell 50%. Four years later, the corporate filed what was then the third-largest bankruptcy filing ever within the United States.
Sirower and Weirens, who respectively lead Deloitte’s mergers and acquisitions (M&A) and global financial advisory businesses within the US, also provide examples of much more successful deals. For example, shares of Avis Budget Group rose 105% within the 12 months following the corporate’s announcement that it will acquire car-sharing leader Zipcar in an all-cash transaction.
The challenge for investors is to predict M&A winners and losers. An vital clue, in keeping with the authors, is the stock market’s initial response to the deal announcement. In the Conseco/Green Tree case, the customer’s stock price immediately fell 20%, while Avis Budget Group’s stock price rose 9% on the Zipcar news.
These are usually not isolated examples. His extensive empirical findings include that in his sample of 1,267 M&A deals over the period 1995-2018, one-year returns for acquirer stocks with initial positive returns averaged +8.4%, in comparison with -9.1% for stocks with initial negative returns . Of the customer stocks that rose when the deal was announced, 65.2% posted gains in the next 12 months, while 57.1% of stocks that fell upon the announcement were still within the red a yr later.
In short, the market typically recognizes from the outset whether a newly announced transaction will ultimately add value or depreciate value for the acquirer’s shareholders (and for the acquired company’s shareholders if the transaction currency is shares). What explains this premonition? Sirower and Weirens use case studies to make their argument: A win is more likely if the acquirer’s management provides an in depth breakdown of plausible, expected synergies that’s sufficient to cover the premium paid for the goal’s shares (or within the case of an estimated value). ) to justify the business area being taken over by one other company).
Conseco / Green Tree illustrated the alternative case. Conseco previously delivered the very best total return to shareholders within the S&P 1500 over a 15-year period by combining 40 regional insurance firms. Management mastered the strategy of immediately reducing back office costs, making the synergies highly predictable. In contrast, Conseco vaguely described its diversification into consumer lending with Green Tree as “strategic” fairly than cost-based. Investors didn’t buy the cross-selling story and the initial price drop of 20 percent proved to be prologue. (The deal’s high 83% premium didn’t help.) Conseco’s stock price fell by half inside a yr, and the corporate went bankrupt a number of years later.
As the word “company” within the subtitle suggests, the first audience for this book is corporate managers and directors, not securities analysts. Nevertheless, the authors offer extremely invaluable information for assessing from the skin whether a specific M&A transaction is prone to create or destroy wealth. To make this determination, we recommend supplementing discounted money flow evaluation with economic value creation methods. Sirower and Weirens show methods to glance through the acquired company’s GAAP earnings, that are commonly used to justify the premium over multiples paid in comparable transactions. For example, earnings per share generated for financial reporting purposes might be overstated attributable to one-time items or decreased attributable to upcoming collective bargaining agreement renewals – a problem that’s currently gaining in importance given rising inflation. Investment organizations with sufficient resources can even conduct the style of business due diligence that the authors require buyers to do, including surveys of participants within the combined company’s key markets.
As a part of this note, Sirower and Weirens subject traditional analyzes of M&A transactions to well-deserved scrutiny. Contrary to the idea that acquisitions only make sense in the event that they have a positive impact on earnings, the authors indicate the low correlation between accruals/dilutions and market response. Many academic studies ask whether acquisitions work best once they occur in “related” or “unrelated” corporations, or somewhere in between. However, many goal corporations operate in several business areas and due to this fact tick a couple of box. Sirower and Weirens also caution against specializing in the expansion rate of the merging corporations’ goal market. The growth rate of the market attributable to their combined activities might be lower.
Even as they cite the shortcomings of acquisitions which can be either poorly planned or driven by CEO egos, Sirower and Weirens emphasize their belief within the virtues of properly planned and executed mergers and acquisitions. Investors can improve their probabilities of separating the wheat from the chaff through the use of a number of the less familiar tools they describe, resembling shareholder value in danger and the meet-the-premium line. Calculating the comparative performance of all-stock, all-cash and combination trades within the book can also be helpful. Given the risks, investors should definitely make the most of the expertise and insights they supply.
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