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.