By Hilary Johnson
Cash is king when it comes to M&A, a study by KPMG International found. When companies finance acquisitions with cash, there’s a better chance of success in the long run.
The KPMG study took a look at 460 deals worldwide that were announced between 2002 and 2006, and followed up by looking at share prices at one year, and then at two years.
The study showed that based on normalized stock returns, the average all-cash deal returned 1 percent at one year, and 2.9 percent at two years. Conversely, all-stock deals slumped, returning a negative 5.3 percent at one year and negative 9.8 percent at two years. Deals that were financed with both cash and stock came in somewhere in the middle.
The authors of the study, Daniel D. Tiemann, U.S. lead partner for the Transaction and Restructuring Services group at KPMG LLP, and University of Chicago Booth School of Business Professor Steven Kaplan, performed a similar study two years ago, which showed similar results, prompting Mr. Tiemann to write in a press release, “"While the deals studied occurred before the global crisis, the findings are so consistent with our 2007 study, it leads us to believe that certain variables have a greater impact on deal outcomes - regardless of the economic backdrop."
The study also found that lower than average price-earnings ratios are also important for deals, the study showed, although this may just be a product of a de facto risk control, the authors opined.
"Acquirers with lower P/E ratios are probably not as tempted to engage in riskier deals, since their stock is relatively under-priced in the market," wrote Steven Kaplan, professor of the University of Chicago Booth School of Business, who helped analyze the findings
The authors also noted that companies that closed no more than three to five deals in a year were most successful.
The full study can be accessed here.
http://www.us.kpmg.com/Rutus_Prod/Documents/12/determinents-of-ma-success-2010.pdf
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