Most acquisitions and divestments don’t maximise value – even when some dealmakers think they do. But acquirers who prioritise value creation at the onset outperform peers by as much as 14 per cent.
Published (Updated )
Cass Business School provided the market analysis for a PwC and Mergermarket study of 600 global senior corporate executives which found that only 61 per cent* of buyers believe their last acquisition created value. However, acquirers that prioritise value creation from the onset of the deal outperform their industry benchmark by 14 per cent on average 24 months after completion, while divestors that prioritise value creation can outperform industry peers by 6 per cent for the same period.
Although value creation strategies are becoming vital to long-term success, the study shows that 53 per cent of acquirers are underperforming their industry peers, on average, over the 24 months following completion of their last deal based on total shareholder return (TSR). Similarly, 57 per cent of divestors are underperforming their industry peers, on average, over the 24 months following completion of their last deal based on TSR.
Despite these figures indicating that many deals fail to realise the value that they intended to generate, those deals that prioritise value creation can generate a significant amount of value. So what exactly are the factors responsible for creating value in deals?
The Creating value beyond the deal report explores how corporations – both on the buyer and seller side - approach value creation throughout a deal. Using industry data, interviews with senior corporate executives, and academic support from the Cass Business School, the research team analysed eight years of transaction data to determine what made them so successful.
Malcolm Lloyd, Global Deals Leader, PwC comments:
“As dealmakers are coming under increasing pressure to deliver more value from their M&A activity, companies that establish rigorous criteria for value creation early on in the buying or selling process are best positioned to maximise the returns from the transaction.”
Three main considerations emerged from the research:
Stay true to the strategic intent
Organisations should approach deals as part of a clear strategic vision and align deal activity to the long-term objectives for the business. 86% of buyers surveyed who say their latest acquisition created significant value also say it was part of a broader portfolio review rather than opportunistic.
Be clear on all the elements of a comprehensive value creation plan
Ensure a thorough and effective process for conducting the deal with the necessary diligence and rigour in the value creation planning process across all areas of the business. Consider how each of these support the business model, synergy delivery, operating model and technology plans. For acquisitions with significant value lost relative to purchase price: 79 per cent didn’t have an integration strategy in place at signing, 70 per cent didn’t have a synergy plan in place at signing, and 63 per cent didn’t have a technology plan in place at signing.
Put culture at the heart of the deal
Talent management and human capital affect how businesses are able to deliver value pre- and post-deal. 82 per cent of companies who say significant value was destroyed in their latest acquisition lost more than 10 per cent of employees following the transaction.
The conversations with corporate executives show that companies that genuinely prioritise value creation early on – rather than assume it will happen as a natural consequence of the actions they take as the transaction proceeds – have a better track record of maximising value in a deal.
"It was interesting to see that only 34 per cent of acquirers say value creation was a priority on Day One (deal closing) in their latest deal, though 66 per cent said it should have been a priority,” says Malcolm Lloyd. “This highlights the need to continually evaluate and refine the way value creation is approached within organisations.”
John West, Managing Editor, EMEA, Mergermarket, comments:
“This fascinating research shows just how often value is left on the table following M&A – and how frequently dealmakers don’t even realise it. Drafting value creation plans cannot just be a box to tick to get the deal over the line. There needs to be execution post-close.”
Dr Valeriya Vitkova, Cass Business School, comments:
“Too often in the past phrases like ‘strategic fit’ and ‘cultural match’ have dominated justifications given for acquisitions, without any ‘hard’ evidence provided for these claims. The analysis presented in this report provides excellent insights into what really matters in deals and perhaps as importantly, what doesn’t matter.”
You can download the report here.
Corporate culture and M&As
This PwC report proposes the importance of the cultural compatibility between acquirer and target involved in a deal. This matches with what Dr Zhenyi Huang, Research Fellow at the Cass M&A Research Centre, together with her co-authors, found in the paper ‘Corporate Culture and M&As’.
This paper finds that the corporate cultural divergence between acquirers and targets has a negative impact on the deal value creation and posts significant frictions on the multiple aspects of deal transactions. It points out that many deals could fail to deliver the expected synergy values due to the post-merger integration difficulties involved with the cultural incompatibility.
Dr Huang said:
“The findings from this paper – which has a different international deal sample and a quantified culture measurement – supports what the PwC report says on the importance of the cultural fit and having a value creation plan while ‘putting culture at the heart of the deal’.”
Find out more about the M&A Research Centre and their work here.