Global M&A: Fewer deals, But Better Quality

Global M&A: Fewer deals, But Better Quality

Despite the fall in deal volumes, the amount of value created by M&A in 2013 was well above the long-term average, highlight McKinsey analysts.

David Cogman of McKinsey, in his June 2014 report titled: “Global M&A: Fewer deals, better quality,” points out that in 2013, acquirers continued to improve their discipline in creating value.

Enhanced value

The McKinsey report highlights that the amount of value created by M&A in 2013 continued to be well over the long-term average, despite decline in deal volume.

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Based on an analysis done by McKinsey of the market’s reaction to M&A events, the net value measured as deal value added dropped to 12% from 12.9% in 2012. However, it still remained well above the 15-year average:

Interestingly, the report points out that despite M&A seeming to be creating more value, companies are doing less of it. M&A volume more than doubled over the past decade in absolute terms, relative to global equity market capitalization, but the level in 2013 was about the same as at the bottom of the last M&A cycle witnessed in 2002 and 2003.

Moreover, it was also substantially lower than the peak of M&A activities clocked in 2007, dropping from 9.1% of global equity-market capitalization that year to 7.4% in 2013. In fact, the portion attributed to corporate acquirers over that time period too fell from 7.4% to 5.4%. This was the lowest level since the late 1990s, with 2002 being the sole exception.

Decline in over-payers

Taking a closer look at the percentage of over-payers (POP), the McKinsey report points out acquirers also continued to enhance their discipline at capturing value for their shareholders.

As can be deduced from the following graph, the proportion of deals followed by a decline in the acquirer’s share price (implying the percentage of POP) dropped to a new low of 45%, which is significantly better than the historic average of 58%.

M&A Decline in over-payers

The report also highlights that since 2010, over half of all deals have left the acquiring and acquired companies worth more together than they were apart. Moreover, even acquirers who were long seen to be ceding most of the value created by a merger to acquired-company shareholders, are no longer destroying value.

Rationale for more value creation

The McKinsey report also highlights that companies are clearly being more selective about M&A, holding potential deals to a higher bar. The report also points out increasingly professionalized corporate M&A and business-development groups have further contributed to enhanced value creation.

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