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Do mergers typically work for the aquirer?

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M&A Can Pay Off, but It’s Far From a Sure Thing

Companies can get better at doing successful mergers and acquisitions, advisers say

By Ben Dummett, WSJ

Sept. 17, 2023 5:30 am ET


Thermo Fisher, a serial acquirer, emphasizes keeping employees as key to its deal-making success.

Does M&A work? The latest research says it’s a tossup.


Business-school students are often taught that successful mergers and acquisitions are a long shot. One influential Harvard Business Review article, dating from 2011, says a range of studies show roughly 70% to 90% of deals fail to create value for the buyer.


And many investors worry that takeovers are more reliably lucrative for investment banks—which LSEG says earned some $13.1 billion in M&A fees in the first half of this year—than for the acquiring companies and their shareholders.


But more recent research from academics and consultants puts the success rate closer to even. Companies that do frequent smaller deals, as well as making bigger bets, tend to outperform, advisers say. That is because they hone their ability to identify targets, integrate those businesses and reap the intended financial benefits.


Companies should always weigh up deal making against alternative uses of funds, said Barry Weir, Citigroup’s co-head of European mergers and acquisitions.


“If the risk-adjusted return from M&A is higher than the benefits from returning cash to shareholders or some other lower-risk alternative, then it makes sense,” Weir said. “If it doesn’t meet this hurdle then you shouldn’t be doing M&A.”



Since the global financial crisis, stock in companies doing deals worth $100 million or more on average has beaten peers 53% of the time, said Naaguesh Appadu, a senior research fellow at the Bayes Business School of City, University of London who tracks this metric closely.


Deal making can help companies boost sales and profit faster than would otherwise be possible. Buyers can gain customers by moving into new locations, or by adding new products and services, and can cut costs by eliminating overlapping operations.


The risk is that the promised financial benefits don’t cover the often hefty premium paid for a target.


Companies can encounter unanticipated delays, regulatory pushback or extra costs; new products can fail to meet expectations; and key employees can walk out. Big deals also risk distracting top executives from their day jobs. Integrating the target’s operations is often easier said than done and can take longer than anticipated.


One serial acquirer is Thermo Fisher Scientific TMO -0.02%decrease; red down pointing triangle, which sells lab equipment, chemicals and tests. In 2021, the Waltham, Mass.-based company struck a $17.4 billion deal for PPD, a big bet investors applauded.


From six months before the deal was unveiled through the end of 2021, shortly after the deal closed, Thermo Fisher stock gained more than 43%, beating the S&P 500 index, according to FactSet. Appadu at City recommends looking at a buyer’s shares six months ahead of a deal as a starting point for gauging its unaffected stock price.



Thermo Fisher emphasizes keeping employees as key to its deal-making success, and uses the makeup of its management team to show its commitment to incoming staff, Chief Executive Officer Marc Casper said in an interview. That team includes executives from acquired companies, such as Chief Operating Officer Michel Lagarde.


Stock investors often have strong initial reactions to an announced deal, and that first response is often a good longer-term signal, said Mark Sirower, an M&A adviser at Deloitte Consulting. The more a stock rises, the more the market believes the buyer can justify the premium paid, by achieving planned boosts to sales and profit, Sirower said.


His data shows 57% of stocks that started off with a positive performance around the deal announcement stayed ahead a year out, while almost two-thirds of the stocks that initially fell remained lower 12 months later. To measure initial performance, Sirower compares where a stock stands five trading days after a deal is unveiled with where it stood five days beforehand.


Overall, Sirower said his data showed odds of a sizable deal succeeding were “slightly less than a coin flip.” His research shows that between 1995 and 2018, buyers’ stock lagged behind peers 56% of the time in the year after a deal announcement.


Deals that flame out also attract a lot of attention.


In 2019, Fidelity National Information Services FIS 0.92%increase; green up pointing triangle made a big bet on payments processing by buying Worldpay, in a deal that valued the target at roughly $43 billion. The buyer, known as FIS, forecast hundreds of millions of dollars in additional revenue from cross-selling, plus hefty cost savings.


Instead, increased competition led to shrinking profit margins and underwhelming revenue growth at Worldpay. Within four years, FIS had taken a $17.6 billion noncash charge against its payments-processing business, and in July it sold a majority stake in a deal valuing Worldpay at $18.5 billion.


“FIS was on the wrong side of change of where future growth was going to come in processing payments,” as it tried to keep pace with rivals as the sector consolidated, said Dan Dolev, an analyst at Mizuho Securities.


FIS declined to comment.


Write to Ben Dummett at ben.dummett@wsj.com

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