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December 11, 2011 9:03 pm
A government-commissioned report has revealed that over the past decade mergers and acquisitions have had a short-term positive boost on the economy, challenging views that takeovers are damaging.
The report was commissioned in the wake of the political backlash triggered by the takeover of British confectioner Cadbury by US snacks group Kraft, after which 200 jobs are set to be lost, and a reform of UK takeover rules to give targeted companies more power to rebuff bids.
The research by Cass Business School for the Department for Business, Innovation and Skills, found that the UK economy benefited from an average short-term boost of £178m per deal from domestic M&A activity, through the gains in the combined share prices of the companies involved in the 40 days following a deal.
Acquirers are found to outgrow their peers in the following three years, in terms of both employment and revenue. The report, which surveyed more than 3,200 deals involving a UK target between 1997 and 2010, shows that M&A activity creates jobs: employment levels at an acquiring company grow by 34 per cent, 42 and 50 per cent above the industry average in the three years following a takeover.
The longer term economic benefits are less certain however. While investors in a portfolio of UK acquirers during the period would have outperformed the market, in the longer term, the majority of UK companies were unsuccessful in adding value through acquisitions.
“More firms fail in numbers but the successful acquirers add more than the unsuccessful destroy,” explained Anna Faelten, senior researcher at the M&A Research Centre at Cass and author of the report. “Although most acquirers fail, the ones that are successful add significant value to their shareholders. So acquisitions are difficult corporate events to pull off but if you get it right, the benefits are significant.”
The research found some evidence that M&A resulted in an overall improvement in efficiency.
Hostile deals – of which Kraft/Cadbury was initially one example – also generate more shareholder value compared with those involved in friendly takeovers, according to the study. Smaller deals by larger acquirers tend to add most value.
The research comes at a time when companies have found it difficult to execute takeovers. According to a study of senior executives from European listed companies by UBS and Boston Consulting Group, 60 per cent plan to stand back from M&A in 2012. More companies are expecting acquisitions in 2012 than at the same time last year however. A third of those with market capitalisations of more than €15bn said they were likely to make big acquisitions.
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