KPMG Ma Success Factors

TraNsaCTioN sErviCEs

The Determinantsof M&A SuccessWhat Factors Contribute to Deal Success?

2010In conjunction with Professor Steven Kaplan of the University of Chicago Booth School of Business

advisory

© 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A


M&A Deals Respond to the Credit Crunch: What Factors Contribute to Deal Success?The deal environment remained challenging in 2009. The dollar value of global deals fell 41 percent in the third quarter of 2009, from the third quarter of 2008 to $478 billion. It was the eighth consecutive quarter that the value of U.S. deals fell from a year earlier. It is no secret that the M&A market was negatively affected by several factors. In addition to a lack of financing options, acquirers and sellers were confronted with the problem of making realistic valuations in the face of rapidly declining revenues and uncertain consumer and business demand.

However, several large deals were announced, such as Pfizer’s US$68 billion acquisi-

tion of Wyeth. Certain industries, such as the financial sector, also showed some

increasing activity. In addition, acquirers demonstrated an appetite for smaller deals

and distressed assets.

When companies are under even more shareholder scrutiny than usual, it is impor-

tant to examine the factors that are correlated with deal success, which we define

in this study as an increase in shareholder value. In addition to more commonly

examined factors, such as financing options, this study looks at less frequently

examined factors, such as deal rationale. This white paper is a follow-up to one

completed in 2007, in which we examined deals announced between 2000 and

2004. This study is based on an analysis of 460 worldwide corporate deals that were

announced between January 1, 2002 and December 31, 2006. We hope that you find

this white paper thought-provoking and that it contributes to a continuing dialogue

on the economics of deal-making. This research has been conducted in consultation

with Professor Steven Kaplan of the University of Chicago Booth School of Business.

KEY FINDINGS:Based on our analysis of normalized returns and the variables examined, we found: • Cash-onlydealshadhigherreturns

thanstock-and-cashdeals,andstock-only deals

• AcquirerswithlowerP/Eratios completed more successful deals

• Thenumberofpriordealspursuedbyanacquirerwasrelevant;thosewhoclosed three to five deals were the most successful

• Transactionsthatweremotivatedbyincreasing“financialstrength”weremost successful

• Dealsthatweremotivatedby adesiretopurchaseIPortechnologyand those motivated by a desire to increase revenues were least successful

• Thesizeoftheacquirer(basedonmar-ket capitalization) was not statistically significant

2 T H E D E T E R M I N A N T S O F M & A S U C C E S S


MethodologyIn this study, we analyzed the stock performance of companies that announced deals

between 2002 and 2006, one and two years after the deal announcement. Stock

prices were normalized on an industry basis. When we refer to a variable or acquisi-

tion characteristic as being successful, the characteristic is associated with stock

returns that are both positive and statistically significant. The deals included in

this study involved acquisitions where acquirers purchased 100 percent of the target,

where the target constituted at least 20 percent of the sales of the acquirer and

where the purchase price was in excess of US$100 million. The average deal size of

the transactions in this study was US$3.4 billion; the median was US$0.7 billion.

The variables that we examined included the following:

• How the deal was financed—stock vs. cash, or both

• The size of the acquirer

• The price-to-earnings (“P/E”) ratio of the acquirer

• The P/E ratio of the target

• The prior deal experience of the acquirer

• The stated deal rationale

• Whether or not the deal was cross-border

The Statistically Significant FactorsTRANSACTION CHARACTERISTICS

Every deal possesses numerous characteristics: Is the deal being financed by cash,

stock or a combination? Is the acquirer worth more than US$10 billion? Is its P/E

ratio above or below average for that industry? Why is the acquirer doing the deal?

While many of these factors are a given, such as a company’s market capitalization

(“market cap”), it is still interesting to examine how these factors correlate with the

success of recent deals.

Our study found that certain factors, including how the deal was financed, had a

strong correlation with deal success. Other factors, such as the market cap of the

acquirer, were not statistically significant. Deals that were financed with cash and

those in which the acquirers had low P/E ratios were most strongly correlated with

deal success. In terms of deal rationales, deals motivated by financial considerations

were most successful. On the other hand, deals motivated by a desire to acquire

intellectual property or to increase revenues were least successful. A detailed

examination of these findings follows.

Deal CurrencyCASH IS STILL KING

Does financing structure have an effect on a deal’s success? Cash deals, compared

with stock deals, were significantly more successful, measured after both 12-month

and 24-month intervals. Based on normalized stock returns, the average cash deal

in the study showed a return of 1.0 percent after one year, and 2.9 percent after two

years. In other words, acquirers financing deals with cash returned 1 percent above

the industry average after one year. Deals financed solely with stock were signifi-

cantly less successful. The average all-stock deal in our study returned negative 5.3

percent after 12 months and negative 9.8 percent after 24 months. Deals that were

financed with both cash and stock performed between the two extremes

and returned negative 3.8 percent after one year and negative 3.7 percent after

two years.

These results are similar to those that we found in our previous study on deals

announced between 2000 and 2004. During that time period, cash deals were also

significantly more successful than stock deals.

12 months 24 months

1.0

2.9

(5.3)(3.8)

(9.8)

(3.7)

4.0%

2.0%

0.0%

(2.0)%

(4.0)%

(6.0)%

(8.0)%

(10.0)%

(12.0)%

ReturnsonFinancingOptions

Cash deals Stock deals Cash and stock deals

Nor

mal

ized

sto

ck re

turn

(%)

Companies using stock may perceive their stock to be a “cheaper” currency than

cash. They may also believe their stock prices have yet to reach their peak, allowing

for stock price appreciation after the acquisition takes place.

In today’s marketplace, where credit is still hard to come by, it is likely that a larger

percentage of deals will be financed with stock or cash on hand. Companies with

relatively healthy balance sheets should, therefore, have an advantage as they pursue

strategic acquisitions. Should more deals continue to be financed with cash, then we

can expect to see smaller deal sizes—those valued at US$1 billion or less—dominat-

ing the marketplace.

T H E D E T E R M I N A N T S O F M & A S U C C E S S 3

Source: KPMG Research



The P/E Ratio of the Acquirer and TargetLESS IS MORE

Similar to our last study, acquisitions made by acquirers who had low P/E ratios

compared to their industry peers were significantly more successful than acquisi-

tions made by high P/E ratio acquirers. Acquirers whose P/E ratios were in the lowest

quartile of this study saw an average return of 4.8 percent after one year and 8.5 per-

cent two years after the deal was announced. Conversely, those companies whose

P/E ratios placed them in the highest quartile experienced a zero percent return after

one year and a negative 6.1 percent return after two years. These results are consis-

tent with those of the 2007 study.

These findings may be due to several possible explanations. Acquirers with lower P/E

ratios are probably not as tempted to engage in riskier deals since their stock is rela-

tively under-priced in the market. In addition, if an acquirer’s P/E ratio is low, it would

tend to value a target more conservatively than an acquirer with a higher P/E ratio in

order to gain an arbitrage on the P/E multiple. An acquirer with a high P/E ratio may

have a more difficult time increasing its value after a transaction, especially if over

time its P/E reverts back to the industry mean.

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

(2.0)%

(4.0)%

(6.0)%

(8.0)%

4.8

8.5

12 months

1st quartile (lowest P/E) 4th quartile (highest P/E)

24 months

(6.1)

ReturnsBasedonAcquirerP/E

Nor

mal

ized

sto

ck re

turn

(%)

0.0




The P/E ratio of the target was also statistically significant. In contrast to our previ-

ous study, acquirers who were able to purchase companies with P/E ratios below

the industry median saw a negative 6.3 percent return after one year and a negative

6.0 percent return after two years. Acquirers who purchased targets with P/E ratios

above the median, including those with negative P/E ratios, had a negative 1 percent

return after one year and a negative 3.5 percent return after two years. These results

are very different from the ones we found in our last study for deals announced

between 2000 and 2004. Those earlier deals demonstrated the more anticipated

results: acquirers who purchased targets with below average P/E ratios were more

successful than acquirers who purchased targets with higher P/E ratios.

It is probable that in the deals announced between 2002 and 2006, acquirers who

purchased targets with high P/E ratios were buying businesses that were growing

and where the acquirer was able to achieve greater synergies. Deals announced

between 2000 and 2004 included deals from the “dot-com” era, where high P/E

ratios were often associated with unprofitable ventures that were not able to meet

future income expectations.

0.0%

(1.0)%

(2.0)%

(3.0)%

(4.0)%

(5.0)%

(6.0)%

(7.0)% (6.3)

(3.5)

(1.0)

(6.0)

12 months

Nor

mal

ized

sto

ck re

turn

(%)

24 months

ReturnsBasedonTargetP/E

Above the medianBelow the median




Deal ExperienceTOO MANY DEALS LESSEN SUCCESS

How many is too many? While doing several acquisitions a year may allow acquir-

ers to develop best practices, too many deals may be counterproductive. The study

found that acquirers who engaged in six to ten deals were much less successful

than acquirers who made between three to five acquisitions. Acquirers who made

between six and ten acquisitions had negative 14.4 percent returns after one year

and negative 18.5 percent return after two years. Companies that made three to

five acquisitions a year saw their stock price increase 0.5 percent above the industry

average after one year and 0.1 percent after two years.

A limited number of deals allows a company to focus on integration and makes it

easier to devote the necessary resources to its integration efforts. It is very chal-

lenging for a company to attempt to integrate numerous transactions at one time,

and those challenges may ultimately have a negative effect on profitability or other

valuation metrics. Therefore, it is important that active acquirers have robust post-

transaction processes in place for integration and synergy capture. Those who made

fewer acquisitions may also have been discriminating in choosing an appropriate

target, which increased their chances for deal success.

5.0%

0.0%

(5.0)%

(10.0)%

(15.0)%

(20.0)%

0.5 0.1

Nor

mal

ized

sto

ck re

turn

(%)

24 months12 months

(14.4)

(18.5)

Returns Based on Number of Deals

3–5 Deals 6–10 Deals




Deal RationaleIMPROVINGFINANCIALSTRENGTHLEADSTOMORESUCCESS

In order to determine whether certain deal rationales corresponded to more success-

ful deals, our study examined statements made in press releases, public filings, and

other publications. After one year, acquirers who stated that their acquisitions were

motivated by increasing financial strength saw their stock prices increase by 2.9 per-

cent above their industry peers; acquirers who said that their deals were motivated

by geographic expansion saw their stock price increase by an average of 3.8 percent.

After two years, those motivated by financial strength saw their stock price increase

an average of 4.4 percent; but companies motivated by geographic expansion gained

only 0.5 percent stock price increase after two years. These results are similar to

those found in our 2007 study where deals motivated by financial strength were the

most successful. In addition, acquirers who said they were motivated by the desire

to purchase hard assets saw their stock price increase 4.6 percent after two years, a

121-basis point swing from a negative 7.5 percent return after one year.



BUYINGINTELLECTUALPROPERTYCANBEOVERLYEXPENSIVE

Some deal rationales seemed to lead to less successful stock returns. After one

year, companies whose stated motivation was acquiring intellectual property saw

their stock prices decline by 10.8 percent in comparison to their industry peers. After

two years, their stock prices declined by almost 11 percent. Acquirers who said their

deals were motivated by increasing revenue saw their stock prices decline by 8.6

percent after one year and 12.7 percent after two years. In the 2007 study, acquirers

who were motivated by the acquisition of IP and technology were also among the

least successful acquirers.

6.0%

4.0%

2.0%

0.0%

(2.0)%

(4.0)%

(6.0)%

(8.0)%

(10.0)%

(12.0)%

3.82.9

(3.3)

(5.1)(6.6)

(7.5)(8.6)

(10.6) (10.8)12 months

Nor

mal

ized

sto

ck re

turn

(%)

StockPriceIncreaseBasedonDealRationaleAfter 12 Months

6.0%

4.0%

2.0%

0.0%

(2.0)%

(4.0)%

(6.0)%

(8.0)%

(10.0)%

(12.0)%

(14.0)%

4.6 4.4

0.5

(8.0) (8.7)(9.7) (10.0) (10.8)

(12.7)24 months

Nor

mal

ized

sto

ck re

turn

(%)

StockPriceIncreaseBasedonDealRationaleAfter 24 Months

Geographical expansion

Product expansion

Revenue increase

Financial strength

Earnings accretion

Distribution

Cost savings

Hard asset buy

IP / Technology





These findings may be explained by the fact that companies motivated by financial

strength have generally identified specific areas of synergies that may be imple-

mented with focus, especially when compared with the more complex goal of

increasing revenues. In addition, since this study includes deals affected by the

stock market decline in 2008, companies whose deals increased financial strength

were probably at a substantial advantage, compared to their peers.

As we found in the 2007 study, companies that made acquisitions motivated by

a desire to increase revenues had a much more difficult task. Those companies

need to get new products to new customers through more distribution channels.

Those goals are much more difficult to achieve. Unsuccessful deals motivated by

a desire to purchase intellectual property or technology may be the result of very

high multiples, since companies with unique intellectual property may be able to

command a high price. That higher price may ultimately not be justified, especially

in today’s marketplace with more volatile revenue streams and less predictable

consumer spending habits.




Deal Characteristics That Were Not Statistically SignificantCertain factors that we examined for this study did not turn out to be statistically significant for deal success.

ACQUISITIONACTIVITYINGENERALWASNOTSIGNIFICANT

According to the data analyzed in this study, an acquisition itself did not have a sta-

tistically significant effect on the returns of the companies analyzed. In other words,

the fact that a company announced an acquisition did not affect its stock price after

one or two years. This data contrasts with the results of the study conducted in 2007

when we found that deal making had a positive effect on stock performance after

both one and two years.

ACQUIRER’SSIZEWASNOTASIGNIFICANTFACTOR

The size of the acquirer was not statistically significant in the deals completed

between 2002 and 2006. We found that there was not a significant correlation

between the market capitalization of the acquirer and post-transaction stock

performance. In our earlier study, we found that on average, the deals com-

pleted by smaller acquirers were more successful than the deals completed

by larger companies.

GEOGRAPHICLOCATION

Similar to our earlier study, there was no correlation between deal success and

whether a deal was cross border or if both the acquirer and target were in the same

country.

ConclusionSeveral deal characteristics tend to be present in the most successful deals, most

notably deal currency and an acquirer’s P/E ratios. Those deal characteristics were

positive indicators both in this study and in our 2007 study. What these factors usu-

ally indicate is that the acquirer is using currency that is not overvalued and that the

acquisition’s financial justification has a realistic chance of success. Similarly, deals

motivated by financial strength, a goal that may be simpler to achieve, also accom-

panied the deals that resulted in the greatest returns for shareholders in both time

periods. We hope that this statistical analysis continues to spark discussions among

deal makers and adds to the dialogue that helps both acquirers and targets create

the most successful transactions.



For more information, please contact:Transaction Services—Global and Americas Daniel D. Tiemann +1 (312) 665 3599 [email protected]

Transaction Services—EMA RenéVader + 31 (20) 656 8953 [email protected]

TransactionServices—ASPAC Kevin Chamberlain + 61 (2) 9335 7112 [email protected]


The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 148 countries and have 113,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is legally distinct and separate entity, and describes itself as such.

Written by Sherrie Nachman, New York, NY

© 2009 KPMG International. KPMG International is a Swiss cooperative. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved. © 2009 KPMG LLP, a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. 091002A

KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

kpmg.com

KPMG Ma Success Factors

Documents

Transcript of KPMG Ma Success Factors