Other Factors Affecting Equity Values
The above discussion “averages” the results for many companies. Individual deals and individual companies will show different results and provide different returns over time from these averages, and takeover and defensive tactics will also need to be customized for each situation.
There are also other factors that will impact on the equity markets for both the target and bidder’s share price. When cash is used to finance the deal instead of issuing more shares, the returns to the bidder are usually higher. In countries such as the United States, where tender offers (often hostile) are common, these do better than friendly mergers. The smaller the target is in relation to the acquirer, the more likely it is that the bidder’s share price will not decline relative to the market.
There are also differences in short- and long-term shareholder value effects. This article has looked principally at the short-term effects around the time of deal announcement, but if a longer-term perspective is taken (more than six months), then the negative returns to the bidder are reduced, although still typically remaining negative. Also, one can look at the combined returns when the bidder and target are taken together over the longer term: in this case as noted earlier, history shows that the overall shareholder wealth effects are typically positive.
Despite the doom and gloom of the analyses that have looked at the success of companies that merge or acquire, there is some hope: Several recent studies (from Towers Perrin/Cass Business School, McKinsey, and KPMG) have shown that acquiring companies since 2003 are doing better with their deals. Not much, but at least measurably so. Some of the suggestions we’ve made in this article have been recently more widely adopted by the market. There is more focus on careful deal selection and corporate governance. Post-merger integration is receiving attention even before the deal closes, and sometimes even before announcement. There is hope—and evidence—with some of these recent studies that perhaps equity markets may start to award an equity premium to companies that acquire well.
Making It Happen
The Key Factors
Understand that the premium offered to the target is only one aspect of the deal’s success, and that it is often overshadowed by other factors, especially people issues.
Formulate a plan for addressing surprises. Try to identify all the ways that the deal could fail … and then look for still more ways it could go wrong.
Do not be overconfident in your ability to integrate an acquisition successfully. Prior experience is helpful, but not sufficient. Each deal is different.
Proper legal advice should always be taken.
Plan for a dynamic deal process where changes will need to be made to the acquisition strategy.
Incorporate a robust communications plan into any deal.
- Page 6 of 6
- Previous section Influencing the Stock Price of the Bidder