Active Collaboration Throughout the Deal

Preserving and Creating Value for Target Companies in M&A

During the M&A cycle, we observe that the likelihood of value creation for the acquirer and emerging NewCo is proportional to the level of involvement of the target company in deal strategy and integration planning. In this paper, we explore the major obstacles to value creation in an acquisition and how the increased involvement of the target company might mitigate those risks.

The typical M&A process nearsightedness

M&A deals are usually initiated by the acquirer, with targets initiating only about 35% of deals.¹ The buy side typically has strategy, operations, legal and financial advisers, whereas the sell side usually has minimal involvement from non-financial or legal advisers.

There is evidence to support that sell-side initiated deals generate less value for their shareholders compared to the buy-side. Buy-side generated deals present higher returns by different measures. For example:

The average bid premium² is higher in buyer-initiated deals than in target-initiated deals.
The excess deal value to EBITDA multiple³ averages 90% in bidder-initiated deals, vs. only 35% in targetinitiated deals.⁴

In addition, studies show that between 70% and 90% of acquisitions lead to value destruction for the acquiring shareholders.⁵ A pressing but addressable cause of value destruction in M&A transactions stems from excluding the target company’s operating model during the integration process.

Footnotes:

1: Ronald W. Masulis and Serif Aziz Simsir. Deal Initiation in Mergers and Acquisitions. ECGI Working Paper Series in Finance, Working Paper N° 371/2013, December 2018.

2: https://ecgi.global/sites/default/files/working_papers/documents/finalmasulissimsir.pdf

3: https://ecgi.global/sites/default/files/working_papers/documents/finalmasulissimsir.pdf

4: Ronald W. Masulis and Serif Aziz Simsir. Deal Initiation in Mergers and Acquisitions. ECGI Working Paper Series in Finance, Working Paper N° 371/2013, December 2018.

5: Clayton M. Christensen, et al., “The Big Idea: The New M&A Playbook,” Harvard Business Review (March 2011).