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  The report shatters several M&A; myths and sheds light on keys to success in increasingly tough market.
Consulting-Times E-zine
Despite the near-term slowdown in deal making, most sectors are expected to keep consolidating, as private equity firms remain influential players.

New BCG study identifies major trends that will continue to drive M&A; through volatile financial markets

One of the largest-ever studies of mergers and acquisitions (M&A;), conducted by The Boston Consulting Group (BCG), identifies several trends that will continue to drive high deal flow, albeit at a reduced rate, through current volatility in the global financial markets.

The study, published in a new BCG report entitled The Brave New World of M&A;: How to Create Value from Mergers and Acquisitions, is based on a detailed analysis of more than 4,000 completed deals between 1992 and 2006. It is believed to be the largest non-academic study of its kind.

"We are seeing a return to normalcy, which is healthy," said Jeff Gell, a Chicago-based partner and co-author of the report, upon its release. "Prices and leverage will come down slightly, but volumes will remain high as the strategic need for most deals is still present. Companies are still sitting on excess cash that they need to deploy, and private equity funds still have large war chests that they need to put to work."

Among the major trends identified:

Global Consolidation Is Accelerating

– Consolidation deals as a portion of the total value of transactions leapt from 48.7 percent in the period 1999 to 2000 to 71.4 percent last year. Globalization, more liberal regulatory environments, and ample funds for M&A; will continue propelling this trend.

Private Equity Is Playing a Growing Role

– Private equity firms' share of the total value of transactions has leapt from 6 percent to 24 percent (1996-2006). In absolute terms, the total value of PE deals soared from $160 billion in 2000 to $650 billion in 2006.

Developing Markets Are Helping Fuel the Boom

– The Americas account for the largest share of deal value (46.5 percent), but Europe has drawn closer (29.5 percent). Between 2002 and 2006, China's and India's deal value grew by 20.4 percent per year.

The study also explodes a number of myths about M&A.; Among the contrarian findings:

Private Equity Is Winning by Paying Less

It's commonly assumed that PE firms have gained an increasingly large share of the M&A; market by using their huge reserves of capital to pay over the top for targets. But BCG's analysis indicates that, on average, PE firms pay lower multiples and lower acquisition premiums than "strategic" buyers. One of the reasons why PE firms appear to pay less, on average, is that they tend not to bid for targets in industries where there is strong consolidation logic and where high multiples are commonly paid, so their average multiples are less influenced by large, individual multiples than those of strategic buyers.

Higher Acquisition Premiums Do Not Necessarily Destroy Value

– Between 1992 and 2006, value-creating deals had a 21.7 percent premium, on average, compared with an 18.7 percent premium for non- value-creating transactions. Paying higher premiums appears to be especially valuable during periods of heightened activity (such as now). Acquirers that pay larger premiums have destroyed less value during these periods.

Bigger Isn't Necessarily Better

– Deals over $1 billion destroy nearly twice as much value on a percentage basis as deals below $1 billion. And deals destroy progressively more value as the size of the target increases relative to the size of the acquirer. Targets worth more than 50 percent of the value of the acquirer destroy twice as much value on a percentage basis as targets worth less than 10 percent of the acquirer.

It Doesn't Always Pay to Be Friendly

– Hostile deals are viewed significantly more favourably by investors in today's market than they were in the preceding wave of M&A; (1997-2001). This could be because most deals since 2002 have been consolidation mergers. Establishing a harmonious relationship with the target tends to be less important in this type of M&A; because the primary goal is usually to realize cost synergies through rationalization, as opposed to growth synergies by teaming-up capabilities.

M&A; Often Creates Substantial Value

Although 58.3 percent of deals between 1992 and 2006 destroyed value for acquirers, with a net loss of 1.2 percent for all transactions, the average deal produced a net gain to shareholders of 1.8 percent when returns of the targets are taken into account. Moreover, the majority of deals (56 percent) created value for the combined set of shareholders. In addition, acquirers in several industries, including automotive and retail, created value, on average, as did acquirers in the Asia-Pacific region.

Cash Is King

– Cash-only transactions have a much more positive impact on value than deals that rely on stock, a mix of stock and cash, or other payment contributions.

The authors point out that in today's M&A; environment, sitting on the sidelines holds risks as well. It not only exposes a company to the threat of a hostile bid, it also gives rivals the opportunity to snatch prime targets and gradually erode the company's competitive position.

"In consolidating industries, joining the brave new world of M&A; may be the only way to survive – eat or be eaten," said Alexander Roos, a Berlin-based partner who coauthored the report with Gell, Kees Cools in Amsterdam, and Jens Kengelbach in Munich. "To avoid becoming prey, companies need to raise their game and adopt a much more professional and systematic approach to M&A.;"

Among the authors' recommendations:

– Professionalize M&A; like any other industrial process, with a strong strategic logic and a rigorous post-merger integration, formulated before a deal is concluded

– Conduct a high-resolution valuation of prospective targets, including assessing the costs of not doing a deal

– Learn from private equity, including the possibility of leveraging up with greater debt
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