Research into deals often shows a reduction in value for the acquiring companies, but is this always the case?
As Chairman of UK and Ireland Corporate and Investment Banking at Bank of America Merrill Lynch, Simon Mackenzie Smith is well aware of research suggesting that a high percentage of deals destroy value for acquiring companies.
Yet Mackenzie Smith believes that deals remain a smart way for companies either to boost their share of existing markets or diversify into new ones. As a banker who has advised on and financed deals dating back three decades, he has seen firsthand the benefits that can accrue. His own experience has convinced him that success often takes time, and must be measured over the full life cycle of a deal – right up to and beyond integration of the target company, a process that can take from 18 months to three years.
That underscores a limitation of research on deals. Invariably, it is short-term, because the long-term effect is muddied by a range of factors potentially including other deals, economic swings and management turmoil. Unlike medical trials, which control for so-called confounding factors, acquisition research often fails to account for other, often-unforeseen influences. “Life often turns out differently,” says Mackenzie Smith.
Concern about showing short-term success can be counterproductive, Mackenzie Smith argues. Often, the premium paid for an acquisition can look value-destructive for the acquirer and great for target shareholders, at least in the short term. And to counter that perception, acquirers can make the mistake of engaging in unsustainable cost-cutting or ineffective integration – moves that can thwart the long-term benefits of a deal.
Mackenzie Smith also notes that research into the success of M&A lumps all mergers and acquisitions together. The purchase of a mid-sized competitor in an existing market is altogether different from a hostile takeover that crosses multiple borders and diversifies the acquirer into new territories.