Executing a Successful Transaction, From Target Selection to Integration
Too often, companies over-emphasize the importance of valuation and immediate earnings accretion as key success factors for M&A. As a result potential value-creating transactions are left on the negotiating table or are avoided entirely. Conversely, other seemingly attractive transactions are consummated under a false sense of security and, ultimately, fail to create value for the company and its shareholders.
The success rate of M&A transactions is well-documented and is overwhelmingly unfavorable. So why do some deals fail while others succeed? In this study, FTI Consulting explores the drivers of shareholder value in mergers and acquisitions and provides clear guidelines for increasing the probability of successful transactions.
FTI Consulting evaluated alpha stock performance (stock returns netted against the sector index returns as measured by Global Industry Classification Standard codes) of 811 transactions in North America over a recent five-year span and found that only 41 percent of transactions create shareholder value in the one-year period post-close. These findings support a widely held and frequently publicized viewpoint on mergers and acquisitions.
Surprisingly, the findings of our study also indicate the market remains optimistic when transactions are announced (52 percent of companies’ experienced positive alpha returns on announcement day), in spite of the body of evidence that contradicts long-term value creation.
We found one explanation for this gap when taking a closer look at the returns of successful transactions (i.e., those that generated positive alpha one-year post-close) compared with unsuccessful ones (i.e., those that generated negative alpha one-year post-close). The average alpha return for successful transactions in our sample set was an astounding 44 percent, compared to an average alpha return of -29 percent for unsuccessful ones. Clearly, M&A presents both significant risk and the potential for outsized gains.