I’ve attached a link above for the latest report from McKinsey which proudly proclaims that we are in an era of value creation in M&A…! If you have a moment, please read this.
Let me be completely honest about this…in my opinion, it is this type of analysis which continues to distract from the reality of deals and lead to the perpetuation of value destruction in M&A. Specifically, there are a number of key points which present considerable flaws in the argument presented:
- The nature of the measure used. Deal Value Added is based on share price movement for the combined entities in the period of 2 days prior to announcement – 2 days post announcement. Whilst I understand that short term market reaction is a factor in particular to transactions which rely on some kind of public offering to raise funds, this does not explain some fundamental flaws: Firstly, equity markets are not perfect and leakage of information continues…so the reaction is not a clean one. Secondly, a 4-5 day period cannot possibly represent anything than the most basic of gut instincts from investors (professional and retail) which, given the minimal amount of information often made available, will be based on the acquirer’s previous trackrecord of deals and the dynamics of the sector. Thirdly, the reality of delivering benefits from acquisitions is, in large scale transactions, is based on a wide range of things, most of which cannot be evaluated in 5 days. Note the recent ‘non’ deal with Pfizer / Astra Zeneca where getting regulatory approval was a factor cited in the deal not being recommended by the board of directors…for any regulated industry, this process alone could take 6-12 months.
- Where the author does have a point, is the use of the considerable cash resources built up by large corporates over the past 5 years…where a transaction may be seen as a more effective method of value creation for shareholders.
What may be happening through much greater scrutiny in the public eye, is a higher level of awareness of the risk presented and as a consequence, a more circumspect approach at board level to any approach by a potential buyer.