kpmg ma success factors
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Success factorsTRANSCRIPT
TraNsaCTioN sErviCEs
The Determinantsof M&A SuccessWhat Factors Contribute to Deal Success?
2010In conjunction with Professor Steven Kaplan of the University of Chicago Booth School of Business
advisory
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
M&A Deals Respond to the Credit Crunch: What Factors Contribute to Deal Success?The deal environment remained challenging in 2009. The dollar value of global deals fell 41 percent in the third quarter of 2009, from the third quarter of 2008 to $478 billion. It was the eighth consecutive quarter that the value of U.S. deals fell from a year earlier. It is no secret that the M&A market was negatively affected by several factors. In addition to a lack of financing options, acquirers and sellers were confronted with the problem of making realistic valuations in the face of rapidly declining revenues and uncertain consumer and business demand.
However, several large deals were announced, such as Pfizer’s US$68 billion acquisi-
tion of Wyeth. Certain industries, such as the financial sector, also showed some
increasing activity. In addition, acquirers demonstrated an appetite for smaller deals
and distressed assets.
When companies are under even more shareholder scrutiny than usual, it is impor-
tant to examine the factors that are correlated with deal success, which we define
in this study as an increase in shareholder value. In addition to more commonly
examined factors, such as financing options, this study looks at less frequently
examined factors, such as deal rationale. This white paper is a follow-up to one
completed in 2007, in which we examined deals announced between 2000 and
2004. This study is based on an analysis of 460 worldwide corporate deals that were
announced between January 1, 2002 and December 31, 2006. We hope that you find
this white paper thought-provoking and that it contributes to a continuing dialogue
on the economics of deal-making. This research has been conducted in consultation
with Professor Steven Kaplan of the University of Chicago Booth School of Business.
KEY FINDINGS:Based on our analysis of normalized returns and the variables examined, we found: • Cash-onlydealshadhigherreturns
thanstock-and-cashdeals,andstock-only deals
• AcquirerswithlowerP/Eratios completed more successful deals
• Thenumberofpriordealspursuedbyanacquirerwasrelevant;thosewhoclosed three to five deals were the most successful
• Transactionsthatweremotivatedbyincreasing“financialstrength”weremost successful
• Dealsthatweremotivatedby adesiretopurchaseIPortechnologyand those motivated by a desire to increase revenues were least successful
• Thesizeoftheacquirer(basedonmar-ket capitalization) was not statistically significant
2 T H E D E T E R M I N A N T S O F M & A S U C C E S S
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
MethodologyIn this study, we analyzed the stock performance of companies that announced deals
between 2002 and 2006, one and two years after the deal announcement. Stock
prices were normalized on an industry basis. When we refer to a variable or acquisi-
tion characteristic as being successful, the characteristic is associated with stock
returns that are both positive and statistically significant. The deals included in
this study involved acquisitions where acquirers purchased 100 percent of the target,
where the target constituted at least 20 percent of the sales of the acquirer and
where the purchase price was in excess of US$100 million. The average deal size of
the transactions in this study was US$3.4 billion; the median was US$0.7 billion.
The variables that we examined included the following:
• How the deal was financed—stock vs. cash, or both
• The size of the acquirer
• The price-to-earnings (“P/E”) ratio of the acquirer
• The P/E ratio of the target
• The prior deal experience of the acquirer
• The stated deal rationale
• Whether or not the deal was cross-border
The Statistically Significant FactorsTRANSACTION CHARACTERISTICS
Every deal possesses numerous characteristics: Is the deal being financed by cash,
stock or a combination? Is the acquirer worth more than US$10 billion? Is its P/E
ratio above or below average for that industry? Why is the acquirer doing the deal?
While many of these factors are a given, such as a company’s market capitalization
(“market cap”), it is still interesting to examine how these factors correlate with the
success of recent deals.
Our study found that certain factors, including how the deal was financed, had a
strong correlation with deal success. Other factors, such as the market cap of the
acquirer, were not statistically significant. Deals that were financed with cash and
those in which the acquirers had low P/E ratios were most strongly correlated with
deal success. In terms of deal rationales, deals motivated by financial considerations
were most successful. On the other hand, deals motivated by a desire to acquire
intellectual property or to increase revenues were least successful. A detailed
examination of these findings follows.
Deal CurrencyCASH IS STILL KING
Does financing structure have an effect on a deal’s success? Cash deals, compared
with stock deals, were significantly more successful, measured after both 12-month
and 24-month intervals. Based on normalized stock returns, the average cash deal
in the study showed a return of 1.0 percent after one year, and 2.9 percent after two
years. In other words, acquirers financing deals with cash returned 1 percent above
the industry average after one year. Deals financed solely with stock were signifi-
cantly less successful. The average all-stock deal in our study returned negative 5.3
percent after 12 months and negative 9.8 percent after 24 months. Deals that were
financed with both cash and stock performed between the two extremes
and returned negative 3.8 percent after one year and negative 3.7 percent after
two years.
These results are similar to those that we found in our previous study on deals
announced between 2000 and 2004. During that time period, cash deals were also
significantly more successful than stock deals.
12 months 24 months
1.0
2.9
(5.3)(3.8)
(9.8)
(3.7)
4.0%
2.0%
0.0%
(2.0)%
(4.0)%
(6.0)%
(8.0)%
(10.0)%
(12.0)%
ReturnsonFinancingOptions
Cash deals Stock deals Cash and stock deals
Nor
mal
ized
sto
ck re
turn
(%)
Companies using stock may perceive their stock to be a “cheaper” currency than
cash. They may also believe their stock prices have yet to reach their peak, allowing
for stock price appreciation after the acquisition takes place.
In today’s marketplace, where credit is still hard to come by, it is likely that a larger
percentage of deals will be financed with stock or cash on hand. Companies with
relatively healthy balance sheets should, therefore, have an advantage as they pursue
strategic acquisitions. Should more deals continue to be financed with cash, then we
can expect to see smaller deal sizes—those valued at US$1 billion or less—dominat-
ing the marketplace.
T H E D E T E R M I N A N T S O F M & A S U C C E S S 3
Source: KPMG Research
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
4 T H E D E T E R M I N A N T S O F M & A S U C C E S S
The P/E Ratio of the Acquirer and TargetLESS IS MORE
Similar to our last study, acquisitions made by acquirers who had low P/E ratios
compared to their industry peers were significantly more successful than acquisi-
tions made by high P/E ratio acquirers. Acquirers whose P/E ratios were in the lowest
quartile of this study saw an average return of 4.8 percent after one year and 8.5 per-
cent two years after the deal was announced. Conversely, those companies whose
P/E ratios placed them in the highest quartile experienced a zero percent return after
one year and a negative 6.1 percent return after two years. These results are consis-
tent with those of the 2007 study.
These findings may be due to several possible explanations. Acquirers with lower P/E
ratios are probably not as tempted to engage in riskier deals since their stock is rela-
tively under-priced in the market. In addition, if an acquirer’s P/E ratio is low, it would
tend to value a target more conservatively than an acquirer with a higher P/E ratio in
order to gain an arbitrage on the P/E multiple. An acquirer with a high P/E ratio may
have a more difficult time increasing its value after a transaction, especially if over
time its P/E reverts back to the industry mean.
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
(2.0)%
(4.0)%
(6.0)%
(8.0)%
4.8
8.5
12 months
1st quartile (lowest P/E) 4th quartile (highest P/E)
24 months
(6.1)
ReturnsBasedonAcquirerP/E
Nor
mal
ized
sto
ck re
turn
(%)
0.0
Source: KPMG Research
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
T H E D E T E R M I N A N T S O F M & A S U C C E S S 5
The P/E ratio of the target was also statistically significant. In contrast to our previ-
ous study, acquirers who were able to purchase companies with P/E ratios below
the industry median saw a negative 6.3 percent return after one year and a negative
6.0 percent return after two years. Acquirers who purchased targets with P/E ratios
above the median, including those with negative P/E ratios, had a negative 1 percent
return after one year and a negative 3.5 percent return after two years. These results
are very different from the ones we found in our last study for deals announced
between 2000 and 2004. Those earlier deals demonstrated the more anticipated
results: acquirers who purchased targets with below average P/E ratios were more
successful than acquirers who purchased targets with higher P/E ratios.
It is probable that in the deals announced between 2002 and 2006, acquirers who
purchased targets with high P/E ratios were buying businesses that were growing
and where the acquirer was able to achieve greater synergies. Deals announced
between 2000 and 2004 included deals from the “dot-com” era, where high P/E
ratios were often associated with unprofitable ventures that were not able to meet
future income expectations.
0.0%
(1.0)%
(2.0)%
(3.0)%
(4.0)%
(5.0)%
(6.0)%
(7.0)% (6.3)
(3.5)
(1.0)
(6.0)
12 months
Nor
mal
ized
sto
ck re
turn
(%)
24 months
ReturnsBasedonTargetP/E
Above the medianBelow the median
Source: KPMG Research
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
6 T H E D E T E R M I N A N T S O F M & A S U C C E S S
Deal ExperienceTOO MANY DEALS LESSEN SUCCESS
How many is too many? While doing several acquisitions a year may allow acquir-
ers to develop best practices, too many deals may be counterproductive. The study
found that acquirers who engaged in six to ten deals were much less successful
than acquirers who made between three to five acquisitions. Acquirers who made
between six and ten acquisitions had negative 14.4 percent returns after one year
and negative 18.5 percent return after two years. Companies that made three to
five acquisitions a year saw their stock price increase 0.5 percent above the industry
average after one year and 0.1 percent after two years.
A limited number of deals allows a company to focus on integration and makes it
easier to devote the necessary resources to its integration efforts. It is very chal-
lenging for a company to attempt to integrate numerous transactions at one time,
and those challenges may ultimately have a negative effect on profitability or other
valuation metrics. Therefore, it is important that active acquirers have robust post-
transaction processes in place for integration and synergy capture. Those who made
fewer acquisitions may also have been discriminating in choosing an appropriate
target, which increased their chances for deal success.
5.0%
0.0%
(5.0)%
(10.0)%
(15.0)%
(20.0)%
0.5 0.1
Nor
mal
ized
sto
ck re
turn
(%)
24 months12 months
(14.4)
(18.5)
Returns Based on Number of Deals
3–5 Deals 6–10 Deals
Source: KPMG Research
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
T H E D E T E R M I N A N T S O F M & A S U C C E S S 7
Deal RationaleIMPROVINGFINANCIALSTRENGTHLEADSTOMORESUCCESS
In order to determine whether certain deal rationales corresponded to more success-
ful deals, our study examined statements made in press releases, public filings, and
other publications. After one year, acquirers who stated that their acquisitions were
motivated by increasing financial strength saw their stock prices increase by 2.9 per-
cent above their industry peers; acquirers who said that their deals were motivated
by geographic expansion saw their stock price increase by an average of 3.8 percent.
After two years, those motivated by financial strength saw their stock price increase
an average of 4.4 percent; but companies motivated by geographic expansion gained
only 0.5 percent stock price increase after two years. These results are similar to
those found in our 2007 study where deals motivated by financial strength were the
most successful. In addition, acquirers who said they were motivated by the desire
to purchase hard assets saw their stock price increase 4.6 percent after two years, a
121-basis point swing from a negative 7.5 percent return after one year.
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
8 T H E D E T E R M I N A N T S O F M & A S U C C E S S
BUYINGINTELLECTUALPROPERTYCANBEOVERLYEXPENSIVE
Some deal rationales seemed to lead to less successful stock returns. After one
year, companies whose stated motivation was acquiring intellectual property saw
their stock prices decline by 10.8 percent in comparison to their industry peers. After
two years, their stock prices declined by almost 11 percent. Acquirers who said their
deals were motivated by increasing revenue saw their stock prices decline by 8.6
percent after one year and 12.7 percent after two years. In the 2007 study, acquirers
who were motivated by the acquisition of IP and technology were also among the
least successful acquirers.
6.0%
4.0%
2.0%
0.0%
(2.0)%
(4.0)%
(6.0)%
(8.0)%
(10.0)%
(12.0)%
3.82.9
(3.3)
(5.1)(6.6)
(7.5)(8.6)
(10.6) (10.8)12 months
Nor
mal
ized
sto
ck re
turn
(%)
StockPriceIncreaseBasedonDealRationaleAfter 12 Months
6.0%
4.0%
2.0%
0.0%
(2.0)%
(4.0)%
(6.0)%
(8.0)%
(10.0)%
(12.0)%
(14.0)%
4.6 4.4
0.5
(8.0) (8.7)(9.7) (10.0) (10.8)
(12.7)24 months
Nor
mal
ized
sto
ck re
turn
(%)
StockPriceIncreaseBasedonDealRationaleAfter 24 Months
Geographical expansion
Product expansion
Revenue increase
Financial strength
Earnings accretion
Distribution
Cost savings
Hard asset buy
IP / Technology
Source: KPMG Research
Source: KPMG Research
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
T H E D E T E R M I N A N T S O F M & A S U C C E S S 9
These findings may be explained by the fact that companies motivated by financial
strength have generally identified specific areas of synergies that may be imple-
mented with focus, especially when compared with the more complex goal of
increasing revenues. In addition, since this study includes deals affected by the
stock market decline in 2008, companies whose deals increased financial strength
were probably at a substantial advantage, compared to their peers.
As we found in the 2007 study, companies that made acquisitions motivated by
a desire to increase revenues had a much more difficult task. Those companies
need to get new products to new customers through more distribution channels.
Those goals are much more difficult to achieve. Unsuccessful deals motivated by
a desire to purchase intellectual property or technology may be the result of very
high multiples, since companies with unique intellectual property may be able to
command a high price. That higher price may ultimately not be justified, especially
in today’s marketplace with more volatile revenue streams and less predictable
consumer spending habits.
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
10 T H E D E T E R M I N A N T S O F M & A S U C C E S S
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
Deal Characteristics That Were Not Statistically SignificantCertain factors that we examined for this study did not turn out to be statistically significant for deal success.
ACQUISITIONACTIVITYINGENERALWASNOTSIGNIFICANT
According to the data analyzed in this study, an acquisition itself did not have a sta-
tistically significant effect on the returns of the companies analyzed. In other words,
the fact that a company announced an acquisition did not affect its stock price after
one or two years. This data contrasts with the results of the study conducted in 2007
when we found that deal making had a positive effect on stock performance after
both one and two years.
ACQUIRER’SSIZEWASNOTASIGNIFICANTFACTOR
The size of the acquirer was not statistically significant in the deals completed
between 2002 and 2006. We found that there was not a significant correlation
between the market capitalization of the acquirer and post-transaction stock
performance. In our earlier study, we found that on average, the deals com-
pleted by smaller acquirers were more successful than the deals completed
by larger companies.
GEOGRAPHICLOCATION
Similar to our earlier study, there was no correlation between deal success and
whether a deal was cross border or if both the acquirer and target were in the same
country.
ConclusionSeveral deal characteristics tend to be present in the most successful deals, most
notably deal currency and an acquirer’s P/E ratios. Those deal characteristics were
positive indicators both in this study and in our 2007 study. What these factors usu-
ally indicate is that the acquirer is using currency that is not overvalued and that the
acquisition’s financial justification has a realistic chance of success. Similarly, deals
motivated by financial strength, a goal that may be simpler to achieve, also accom-
panied the deals that resulted in the greatest returns for shareholders in both time
periods. We hope that this statistical analysis continues to spark discussions among
deal makers and adds to the dialogue that helps both acquirers and targets create
the most successful transactions.
T H E D E T E R M I N A N T S O F M & A S U C C E S S 11
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
12 T H E D E T E R M I N A N T S O F M & A S U C C E S S
© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A
For more information, please contact:Transaction Services—Global and Americas Daniel D. Tiemann +1 (312) 665 3599 [email protected]
Transaction Services—EMA RenéVader + 31 (20) 656 8953 [email protected]
TransactionServices—ASPAC Kevin Chamberlain + 61 (2) 9335 7112 [email protected]
T H E D E T E R M I N A N T S O F M & A S U C C E S S 13
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
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Written by Sherrie Nachman, New York, NY
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