McKinsey: Deal Value Added at 10 Year High as M&A Hits Record High $4T in 2006

With nearly $4 trillion in announced global M&A activity in the first 11 months, 2006 has set a new mergers record. Are companies getting better at M&A? A just published McKinsey Quarterly article provides some very interesting and insightful analysis, and finds that the latest M&A boom appears to be creating more value for the shareholders of the acquiring companies.

McKinsey reviewed nearly 1,000 global mergers and acquisitions from 1997 to 2006, and compiled two indexes of M&A value creation:

Deal Value Added (DVA):  Compares share prices 2 days before and 2 days after each deal was announced in order to assess the financial markets’ initial reaction to the deals. 

Proportion of companies Overpaying (POP): Measures the proportion of all transactions in which the initial share price reaction for the acquirer was negative, indicating that the acquirer overpaid.

How is the current M&A boom creating more value?
  • DVA: During the current boom since 2003, the average DVA has been 6.1%, compared to 3.4% average in the past 10 years. Today, the DVA index is at a ten-year record high of over 10%, compared to  a negative  -5.9% in 2000.
  • POP: In the current boom, the proportion overpaying has averaged 57%, compared to 65% average from 1997 to 2000. Today’s POP index stands near a ten-year low , compared to a high of 73% in 2000.

In the earlier M&A boom, the market judged that in more than two-thirds of the deals, all of the value created went to the target companies’ shareholders. 

McKinsey Explanation for the new value add:

  • Lower deal premiums:  Typical price premium hovered around 30% during the 1990s, while acquirers now pay about 20% premium. 
  • Increase in cash deals: In pure-cash deals an average of around 49% of acquirers overpay, compared with 69% for pure-stock deals. Cash deals also generated an average DVA of +13.7%, compared with -3.3% for pure-stock deals.

Full report available at McKinsey Quarterly (registration required)

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