Why do most mergers and acquisitions (M&A) fail to create value for the acquirer's shareholders? What are the main reasons in your opinion? Identify the difference between a good company and a good investment
Most of publicly traded companies’ mergers destroy value for buy-side shareholders and at the same time sellers are compensated with premiums1. The same opinion is stated in one of the most quoted book about valuation and creating value: most of M&A deals don’t create value for buyers2. According to G. Bennett Stewart there are two main reasons why acquisitions too frequently reduce share prices of the acquiring company: sometimes this occurs because the buyer’s acquisition criteria make no sense, and more often the buyer simply overpays3. But can it be that simple? Following Aswath Damodaran all failure reasons may occur on different stages of M&A deal (see exhibit 1). On the first stage acquisition criteria are the most important. Without doubt M&A deal should be the continuation of company’s strategy – growth of FCF and decrease of getting those FCF risks4. The most powerful framework for company’s strategy analysis is believed to be WOFC5 as well as frameworks established by Bruce Henderson. In most cases managers (not shareholders) are actors who decide what company and at what price should be bought. So, not tendency to create value for shareholders, but private interests may have influence6.
It is already well known that diversification is a false motive for M&A, because it is cheaper and simpler to diversify for certain investor than for whole corporation7. At the same
Frank C. Evans, David M. Bishop. Valuation for M&A. Building Value in Private Companies / John Wiley & Sons, rd Inc. 3 edition, 2009, p. 71 2 Tom Copeland, Tim Koller, Jack Murrin. Valuation: Measuring & Managing the Value of Companies / John Wiley & rd Sons, Inc. 3 edition, 2008, p. 132 3 G. Bennett Stewart, III. The Quest for Value: A Guide for Senior Managers / Harper...
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