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)