## Key Points:
– Poorly planned and executed acquisitions can destroy more investment value than fraud.
– The stock market’s initial response to a deal announcement can indicate whether it will ultimately add or subtract value for the acquirer’s shareholders.
– Detailed breakdowns of expected synergies are crucial in justifying the premium being paid for the target’s stock.
– Assessing M&A transactions requires supplementing discounted cash flow analysis with economic value added methods.
– Traditional analyses of M&A transactions, such as focusing on accretion/dilution or the growth rate of the merging companies’ addressable market, may not provide accurate assessments.
– Properly planned and executed M&As can create value, and investors can use tools like shareholder value at risk and the meet the premium line to improve their chances of success.
The book “The Synergy Solution: How Companies Win the Mergers and Acquisitions Game” by Mark L. Sirower and Jeffrey M. Weirens explores the world of mergers and acquisitions (M&A) by delving into the successes and failures of various deals. The authors, who are experts in the field, provide valuable insights for corporate managers and directors, as well as investors looking to make informed decisions about M&A transactions.
One important point highlighted by the authors is that poorly planned and executed acquisitions can destroy more investment value than acts of fraud committed by managers. This assertion is supported by real-life examples, such as the ill-fated acquisition of subprime mobile home lender Green Tree Financial by insurer Conseco in 1998. Within a year of the deal, Conseco’s stock had plummeted by 50%, ultimately leading to the company filing for bankruptcy.
On the other hand, the authors also highlight successful M&A deals, such as Avis Budget Group’s acquisition of car-sharing leader Zipcar. Following the announcement of the deal, Avis Budget Group’s stock rose by 105% within 12 months. This contrast of successes and failures raises the question of how to predict whether an M&A deal will be beneficial or detrimental to the acquirer’s shareholders.
According to Sirower and Weirens, one clue lies in the stock market’s initial response to the deal announcement. In their sample of 1,267 M&A deals conducted between 1995 and 2018, acquirer stocks with initially positive returns averaged a one-year return of +8.4%, while those with initially negative returns averaged -9.1%. This indicates that the market tends to recognize early on whether a deal will ultimately add or subtract value for the acquirer’s shareholders.
The authors suggest that the detailed breakdown of expected synergies presented by the acquirer’s management plays a crucial role in determining market response. Deals that present plausible and well-justified synergies are more likely to receive positive market reactions. On the other hand, vague descriptions and lack of detail about the expected benefits of a deal often result in negative market sentiment.
To assess the potential value of an M&A transaction, Sirower and Weirens recommend supplementing discounted cash flow analysis with economic value added methods. By looking beyond a company’s GAAP earnings and considering factors such as nonrecurring items or upcoming collective bargaining agreement renewals, investors can gain a more accurate understanding of the potential value created by a deal.
Furthermore, the authors caution against relying solely on traditional analyses that focus on accretion/dilution or the growth rate of the merging companies’ addressable market. These metrics may not provide a complete picture of the deal’s potential value. Instead, investors should consider alternative tools such as shareholder value at risk and the meet the premium line to assess the comparative performance of different types of deals, such as all-stock, all-cash, or combination deals.
In conclusion, “The Synergy Solution” provides valuable insights into the world of mergers and acquisitions. The authors emphasize that properly planned and executed M&As can create significant value for the acquirer’s shareholders. By understanding the key factors that contribute to M&A success, investors can improve their chances of separating successful deals from potential wealth destroyers.
