This year is expected to be one of the top five M&A years in history according to the Institute for Mergers, Acquisitions, and Alliances. The repatriation tax holiday, the high value of equity currency, and companies merging to achieve a competitive offset to the growing relative size of a few corporations are among the factors compelling mergers. Both in terms of activity and success rate, 2018 merger and acquisition performance is a historical stand out.
Breaking from historical precedent, companies that grew their businesses (revenues and assets) by between 20% and 70% through merger and acquisition activity have outperformed the S&P 500 Index year-to-date per JAG research. Long term data on the performance of merging companies is well known, and it is terrible. Three different studies over the last three years have shown respectively that 60%, 83%, and 90% of public companies perform worse following a merger than before a business combination. Three primary reasons for dismal merger results stand out from the research, overpaying, lack of cultural fit, and unmanageable size. Whatever the reason, positive stock performance for acquirers following a merger is unusual. Really unusual. So, what makes this year different?
- Corporations and private equity firms continue to pay up for deals.
- Extensive use of cash is changing post-merger metrics.
- Big remains bad when it comes to corporate combinations.