The Synergy Solution: How Companies Win the M&A Game. 2022. Mark L. Sirower and Jeffery M. Weirens. Harvard Business Review Press.
“Poorly planned and executed acquisitions almost certainly destroyed far more investment value than acts of managerial fraud.”
Investors who remember huge fraud-related wealth destroyers such as Enron, HealthSouth and Parmalat might wonder if this statement from The Synergy solution: How companies are winning the M&A game is correct. Authors Mark L. Sirower And Jeffrey M. Weirens back up their claim, however, with examples such as insurer Conseco’s ill-fated, 1998, all-stock acquisition of subprime mobile home lender Green Tree Financial. A year after the deal was announced, Conseco shares were down 50%. Four years later, the company filed what was then the third largest bankruptcy petition in the United States.
Sirower and Weirens, who lead Deloitte’s US mergers and acquisitions (M&A) and global financial advisory businesses, respectively, also provide examples of far more successful deals. For example, shares of Avis Budget Group have risen 105% in the 12 months since the company announced it was acquiring car-sharing leader Zipcar in an all-cash transaction.
For investors, the challenge is how to predict winners and losers from mergers and acquisitions. The authors reveal that an important clue is the stock market’s initial response to the news of the deal. In the Conseco/Green Tree deal, the acquirer’s share price immediately fell 20%, while Avis Budget Group’s share price rose 9% on Zipcar news.
These are not isolated examples. Among his many empirical results, The synergy solution reports that in its sample of 1,267 M&A deals over the period 1995-2018, the one-year stock returns of acquirers with initially positive returns averaged +8.4%, versus -9, 1% for those with initially negative returns. Of the acquirer stocks that rose when the deal was announced, 65.2% saw gains over the following 12 months, while 57.1% of those that fell when the deal was announced were still down a year later.
In short, the market tends to recognize upfront whether a newly announced transaction will ultimately add or subtract value for the shareholders of the acquirer (and for the shareholders of the acquiree, if the currency of the transaction is l ‘stock). What is this foreknowledge? Sirower and Weirens use case studies to make their case: a gain is more likely when the acquirer’s management presents a detailed breakdown of plausible and expected synergies sufficient to justify the premium paid for the target’s shares (or the value estimated, in the case of a division acquired from another company).
Conseco/Green Tree illustrated the counter case. Conseco had previously generated the highest total shareholder return in the S&P 1500 over a 15-year period by bringing together 40 regional insurance companies. Management had mastered the process of immediately reducing back-office costs, making synergies highly predictable. By contrast, Conseco vaguely described its diversification into consumer loans with Green Tree as “strategic” and not cost-based. Investors didn’t buy the cross-sell story, and the initial 20% price drop turned out to be a prologue. (The deal’s staggering 83% premium didn’t help.) Conseco’s stock price halved within a year, and the company went bankrupt a few years later.
As the word “companies” in the subtitle suggests, the primary target audience for this book is corporate managers and directors rather than securities analysts. Nevertheless, the authors offer extremely valuable guidance for assessing from the outside whether a given M&A transaction is likely to create or destroy wealth. To make this decision, The synergy solution recommends supplementing the discounted cash flow analysis with economic value added methods. Sirower and Weirens show how to look at the acquiree’s GAAP earnings, which are commonly used to justify premium via multiples paid in comparable transactions. Earnings per share generated for financial reporting purposes could, for example, be overstated due to one-time items or head lower due to upcoming collective bargaining agreement renewals, an issue that is currently gaining prominence. given the rise in inflation. Well-resourced investment firms can also perform the kind of commercial due diligence the authors prescribe for acquirers, including surveys of key market participants in the merged company.
In the course of providing this guidance, Sirower and Weirens subject traditional analyzes of M&A transactions to well-deserved scrutiny. Contrary to the belief that acquisitions are only worthwhile if they are accretive to earnings, the authors note the low correlation between accretion/dilution and market response. Much academic research questions whether acquisitions work best when they involve “related” or “unrelated” companies or something in between. Many target companies, however, engage in a variety of activities and therefore tick more than one box. Sirower and Weirens also caution against focusing on the addressable market growth rate of merging companies. The growth rate of the market which is usable by their combined operations could be lower.
Even as they catalog the flaws of ill-conceived or ego-driven CEO acquisitions, Sirower and Weirens emphasize their belief in the virtues of properly planned and executed mergers and acquisitions. Investors can improve their chances of separating the wheat from the chaff by using some less familiar tools they describe, such as shareholder value at risk and the premium line. The book’s calculation of the comparative performance of all-stock, all-cash, and combined trades is also helpful. Given the stakes, investors should certainly take advantage of the expertise and knowledge that informs The synergy solution.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, and the opinions expressed do not necessarily reflect the views of the CFA Institute or the author’s employer.
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