Amid the global credit crunch in 2009, the M&A climate remained challenging. The South African market did not remain unscathed either. According to Mergermarket, the South African M&A landscape saw a total of 85 deals valued at some US$6.8 billion in 2009, a decrease of 61% by value and 42% by volume compared to 2008.
Due to the changing and volatile economic environment and increased shareholder scrutiny, it has become crucial for companies to analyse the factors affecting their M&A deal success.
In a recent publication entitled The Determinants of M&A Success, KPMG’s global Transactions & Restructuring Business Unit and the University of Chicago Booth School of Business analysed the factors that correlate with deal success, defined as an increase in shareholder value.
According to the analysis, the following factors contributed to deal success:
- How the deal was financed, with cash deals being more successful
- Deals in which the acquirors’ had low P/E ratios.
In terms of deal rationale, deals motivated by financial considerations were more successful while deals motivated by desire to acquire intellectual property or to increase revenues were least successful.
- Cash is king – cash deals, compared to share deals, were significantly more successful
- P/E ratio of acquiror and target – acquisitions made by companies with low P/E ratios were significantly more successful with an average return of 4.8% after one year and 8.5% after two years compared to 0% and -6.1% respectively for acquisitions made by companies with high P/E ratios
- Too many deals lessen success – corporates who completed between six to 10 deals were much less successful than corporates who made between three and five acquisitions
- Deal rationale – acquirors motivated by increasing financial strength saw their share prices increase by an average of 2.9% after one year and by 4.4% after two years. Deals motivated by geographic expansion saw a share price increase, on average, of 3.8% after one year but only 0.5% after two years
- Intellectual property – in comparison to their industry peers, companies whose stated objective was the acquisition of intellectual property saw their share prices decline by 10.8% after one year and by 11% after two years.
Summary of trends
- In a tight credit market, it is likely that a large percentage of deals will be financed with shares or cash on hand
- Should more deals continue to be financed with cash, small deals valued at US$1 billion or less will dominate the global M&A landscape
- Companies with low P/E ratios will be less tempted than companies with high P/E ratios to engage in riskier deals. In addition, if a company’s P/E ratio is low, it would tend to value a target more conservatively
- An acquiror with a high P/E ratio may have a more difficult time to increase value after the transaction
- Active acquirors should have robust post-transaction processes in place for integration and synergy extraction.
Looking forward to 2010
In 2010, the South African economy should remain under pressure, leaving room for another possible rate cut which may stimulate the economy and result in an increase in M&A activity towards the end of 2010.