Is M&A self-destructive?

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    Samantha Maraj

    Thoughts on Aswath Damodaran’s comments: “If you look at the collective evidence across acquisitions this is the most value-destructive action a company can take”? It’s hard to fully disagree with him, as by design the acquiring company is paying a “premium” over the agreed market price for its target. What would be the results if we compare the return on the average M&A transaction to the acquiring company vs. say, investing passively in the S&P 500 for the last 10 years?


    @samantha.maraj — Value-destructive? It depends on how you are measuring the value. By your call for a comparison between growth of investment in the acquiring company vs. growth in the investment of S&P 500, it appears that you are looking only from a wealth/investment standpoint. Perhaps if that is the only perspective that matters for someone, then yes – many M&A transactions do not yield share price growth on par with S&P 500. I have not done the math, but at a high level it appears reasonable. However, there are so many value factors to consider and this may not be the most important value characteristic.

    Understand, too, that the 10 year time horizon you ask to use may not be long enough. For example, take the economic downturn from the Great Recession or even the current economic recession due to the pandemic. These will negatively skew your measurements and, while both the acquiring company and the S&P 500 may be impacted, it does not mean they are impacted equally. Additionally, certain M&A transactions in select industries may typically generate more or less returns as a function of the specific industry and not directly attributable to the outcome of the transaction.

    IMHO, a better way to look at it would be to compare the outcome over time to the transaction thesis. Studies by many reputable consulting firms look at a shorter time horizon of 1 – 3 years post-close. Did the M&A transaction achieve the goals for which it was initiated? Did it remove a competitor, create economies of scale, capture market share, obtain new intellectual properties, improve balance sheets? The reasons for M&A transactions vary significantly and are not always about adding investment portfolio value. If they can do that in addition to achieving the transaction thesis over time, all the better! Value is measured in many different ways. One measurement may reflect destruction while another measurement of the same transaction may show significant growth. It’s all a matter of perspective.



    I would say the difference is control and agility to influence growth/value realization via innovation and possibly even other mergers provides more options… if the integrations are successful!

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