New Research Identifies Which M&A Activities Create Shareholder Value

Companies significantly underperform the market during periods when they announce no M&A activity (whether acquisitions or divestments) and even more significantly underperform companies which are actively engaged in M&A, according to new research that identifies the relationships between M&A activity and shareholder value creation.

Conducted by the Cass Business School, City University London, and Intraliks, the study also finds that a limited amount of divestment activity by companies also leads to market outperformance.

The findings also reveal that companies tend to deliver superior total shareholder returns with a balanced strategic M&A portfolio management program, which includes at least one acquisition per year, as well as conducting 1-2 divestments every three years.

"The results show that the relationship between M&A activity and shareholder returns is more complex than previously thought, and that when a strategic approach is taken to M&A portfolio management, companies can significantly outperform the market and their peers," said Phillip Whitchelo, vice president of strategy and product marketing, Intralinks.

Total shareholder return for inactive companies is 1.5% per year lower than the overall market and 3.2% per year lower than companies that announce 1-2 deals.

Considering acquisition activity alone, companies outperform the market the more frequently they announce acquisitions.

Companies outperform the market by 0.1% per year during periods when they announce 1-2 acquisitions, by 2% per year during periods when they announce 3-5 acquisitions, and by 3.4% per year during periods when they announce six or more acquisitions.

Considering divestment activity alone, companies only outperform the market during periods when they announce a limited number of divestments, and significantly underperform the market when they announce a higher frequency of divestments.

Total shareholder return during periods when companies announce 1-2 divestments is 2.3% per year above the market, but companies underperform the market by 3.3% per year during periods when they announce 3-5 divestments, and underperform by 3.6% per year during periods when they announce six or more divestments.

Overall, newly publicly-listed companies underperform the market by 5.6% per year during their first three years after listing. However, when these young companies announce six or more acquisitions during their first three years, they outperform the market by 3.8% per year.

Only medium-aged and mature companies (those which have been publicly listed for 3-9 years and 10 or more years, respectively) outperform the market when announcing 1-2 divestments every three years.

Companies deliver superior total shareholder returns with a balanced strategic M&A portfolio management program, which includes at least one acquisition per year, while also conducting 1-2 divestments every three years (but only once they have been publicly listed for at least three years).

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