Corporate Insights Behind the Numbers: Mastering M&A
(1st Quarter 2018)
- Value creation in M&A
- Making M&A math work for your deals
- I. EPS
- II. Goodwill and intangibles
- III. Premia paid
We are nearly a decade into an economic recovery in the wake of the 2008 financial crisis and its aftermath. In typical economic recoveries, a rising stock market and equity values are accompanied by increasing strategic activity among corporates, as rising equity values boost executive confidence in deal-making and enhanced profitability and rising stock prices provide ample firepower to pay for those deals.
However, we have recently seen that deal activity in the U.S. does not seem to be rising in tandem with equity markets, as it has previously. The graph below1 shows us the breaking of that trend, causing one market observer to dub this "M&A MIA"2
We find this decline in M&A activity puzzling, since growth strategies driven by M&A have consistently outperformed the broader market during the latest recovery. Exhibit 2 revisits an analysis we did at the end of 2016, and shows that those companies that have turbocharged their growth strategies via M&A, in particular since 2012, have consistently outperformed the market and their peers on a TSR basis … and continue to do so. 3
So what is going on?
A recent survey of more than 500 C-level executives reveals that a surprising confidence gap may be responsible for the absence of a strong recovery in M&A activity.4 What lies behind this confidence gap? Executives cited a number of things, including the increasing attraction of joint ventures, as well as continuing uncertainty around key economic and geopolitical issues, such as U.S. tax and trade policy and the consequences of Brexit.
It may also be that this confidence gap is further exacerbated by a pervasive – but, we believe, mistaken – belief that "most M&A deals destroy value".5
In this paper, the ninth in our ongoing series of Credit Suisse Corporate Insights, we revisit M&A and – in particular – the usefulness of some simplistic M&A mathematical shortcuts. First, is there any truth to the notion that “most M&A deals destroy value”? Second, does conventional M&A math provide the right signals about the viability of doing a deal and taking advantage of M&A's demonstrated ability to drive and sustain shareholder value?
To answer this second question, we will look at several accounting-centric ways in which M&A is typically assessed – the math around EPS accretion/dilution, the size of any premium paid, and whether goodwill and intangibles adversely impact the market’s view of operating performance. We believe that each of these ideas needs fresh thinking and – upon revisiting each in turn – we will show that M&A remains a vital and value-creating means of growing businesses, providing platforms for new products, markets and ideas.
- Source: Datastream, Credit Suisse IDC – December 13, 2017.
- Source: Authers, John. "Authers' Note: M&A MIA", Financial Times, December 19, 2017.
- This figure has been adopted and updated from our previous Credit Suisse Corporate Insights series "Tying the knot: M&A as a path to value creation". Universe consists of companies in the U.S., Canada, and Developed Europe across all sectors with market capitalization greater than $200mm (3,462 companies). Acquirers are defined as the companies with cumulative M&A spend as a percentage of cumulative cash flow between 2011 and 2017 in the top 25% of universe, and non-acquirers are defined as companies in the bottom 25% of M&A spend as a percentage of cumulative cash flow. Sourced from Credit Suisse's HOLT framework and global database.
- Sourced from EY's "Global Capital Confidence Barometer: How can M&A deal with today’s demands while activating your digital tomorrow?" October 2017, 17th edition. ey.com/ccb.
- Source: Lewis, Alan, and Dan McKone. "So Many M&A Deals Fail Because Companies Overlook This Simple Strategy." Harvard Business Review, Mergers & Acquisitions, May 10th, 2016. This study, along with various others in the finance industry, mention value destruction due to M&A transactions. Many of these studies have wide variations in methodology and lack a consensus view of how to measure value creation in M&A.