Takeovers can deliver growth

It’s long been the perceived wisdom that takeovers destroy shareholder value rather than enhance it.

The reasoning behind this is that acquiring companies pay too much, the synergy and cost benefits prove illusionary and accepting shareholders just collect the takeover premium and head for the door.

Philip Whitchelo, vice-president of strategy and product marketing at Intralinks thinks this is wrong and he says he can prove it! His company along with the Cass Business School in London, have conducted a worldwide study of more than 25,000 companies and 200,000 deals, during rolling three-year periods over 20 years and have discovered some eye-opening data about takeovers.

Whitchelo told the Australian Financial Review that most other examinations in the area of M&A tended to assess a period of up to 12 months to gauge deal success, rather than the longer term.

And his conclusion was definitive: “If you don’t have an M&A strategy, then you better get one because otherwise as a company you will underperform.”

“When you are young, buy frequently to signal growth to investors.The more frequently you buy, the better you will become at it. When you are older, keep on buying but also look to occasionally shed assets.”

“The study clearly shows that one size does not fit all and that the M&A market is indeed more nuanced,” added Scott Moeller, finance professor at Cass Business School.

Closer to home, performance in the Asia-Pacific region was a classic example.

Active firms in the region – those that conducted one or two deals a year – outperformed the broader market on total shareholder returns by 1.8 per cent, compared with 0.1 per cent outperformance for the global sample. That latter figure might explain the common thinking that takeovers aren’t worth the effort.

But companies that aggressively chase growth do outperform. Asia-Pacific companies in the region that engaged in three to five transactions delivered outperformance of 3.8 per cent, compared with 2 per cent globally, while aggressive acquirers that did more than six deals came in at 6.9 per cent and 3.4 per cent respectively.

The report also found that a limited amount of divestment activity also led to outperformance, but shedding too many assets or divisions had the opposite effect. Including divestments, the report showed the total return performance of firms during periods when they announced no deals was 1.5 per cent lower per year than the overall market. `

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