Big Stock-Based Mergers And Acquisitions Pose Risk To Stock Performance, S&P Global Market Intelligence Research Finds

Sep 13, 2016 / 10:00 AM
New York

S&P Global Market Intelligence, a leading provider of multi-asset class research data and insights, released a new research report today which charts the performance of acquirer returns following large M&A transactions, uncovering the specific deal attributes that are most closely correlated with stock underperformance.

The report, Mergers & Acquisitions: The Good, the Bad, and the Ugly (and how to tell them apart) analyzes the stock market performance of Russell 3000 companies following an acquisition greater than 5% of acquirer enterprise value between 2001 and 2016.  It finds that post-M&A acquirer share price returns have underperformed peers in aggregate for the 1-, 2-, and 3-year periods following the acquisition. The research also explores the fundamental attributes of each deal – such as stock vs. cash funding, historical market performance of acquirer, and cash on balance sheet – to help investors identify the factors most closely linked to stronger and weaker equity performance following the transaction. 

Following were the report’s key findings:

  • Common Attributes Found in Successful Deals: Shareholders looking to identify successful acquisitions should look at acquisitions that use high levels of cash, have had lower historical growth, have repurchased shares, and make relatively small acquisitions.
  • Acquirer Fundamentals Suffer Following Big Deals: In the aggregate, acquirers lag industry peers on a variety of fundamental metrics for an extended period following an acquisition. Profit margins, earnings growth, and return on capital all decline relative to peers, while interest expense rises, debt soars, and other “special charges” increase.
  • Stock Deals Significantly Underperform Cash Deals: Acquirers using the highest percentage of stock underperform industry peers by 3.3% one year post-close and by 8.15 after three years. Acquirers with the highest one-year cumulative M&A spending underperform by 2.0% one year post close and by 9.3% after three years.
  • Rapid Growth Pre-Acquisition is a Bad Sign: Acquirers with the highest pre-acquisition asset growth underperform by 5.8% one year post-close and by 13.3% after three years, while those with the highest pre-acquisition increase in shared outstanding also underperform significantly.
  • Investors Beware Cash on Balance Sheet: Acquirers with the highest level of pre-acquisition cash & equivalents relative to assets underperform peers by 8.6% over one year and 10.1% over three years.

“With $800 billion of M&A activity announced so far this year, the impact of M&A activity on stock performance is a very serious consideration for investors of every type,” said the study’s lead researcher, Richard Tortoriello, of the S&P Global Market Intelligence Quantamental Research team.  “Our research shows that headline promises of M&A synergies and increased growth potential may be more elusive than they appear.  We also help investors identify some of the key attributes that separate a good M&A deal from a bad one, based on quantitative market performance.”

The new research report, Mergers & Acquisitions: The Good, the Bad, and the Ugly (and how to tell them apart) was produced as part of the S&P Global Market Intelligence Quantamental Research team’s ongoing Event Driven Investing Series. To access the full research note, please click here.

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