M&A risk rising, report warns

Mergers and acquisitions (M&A) deals fared their worst in the final quarter of 2017 since researchers began tracking deals’ performance in 2008.

Poor M&A performance is “highlighting the increasing difficulty of delivering successful deals in an overpriced market”, according to a study from London-based academic institution Cass Business School and insurance broker Willis Towers Watson.

The global M&A market has for the first time in ten years reversed a long-term trend of outperforming the index by failing to add value through deals made during 2017, according to the latest Quarterly Deal Performance Monitor.

Acquirers have underperformed the index by 0.9 percentage points in the last 12 months for completed deals over $100m on a year-to-date basis.

The findings also revealed that the final quarter of 2017 has proved especially challenging to deliver value, with dealmakers underperforming the market by 5.6 percentage points below the index.

This marks the lowest quarterly figure recorded since the research began in 2008, Willis Towers Watson warned.

“Global conditions for M&A in 2017 have been tough and delivering a successful deal and realising value is increasingly difficult,” said Jana Mercereau, head of corporate M&A for Great Britain at the insurance broker.

“Inflated price-to-earnings ratios have made deals more expensive, with companies often paying large premiums in a bidding war or as a defensive tactic, and making it increasingly difficult to realise a strong return,” said Mercereau.

“However, of the 198 deals completed so far in this quarter, 88 still outperformed the index. So, we are still seeing value in M&A activity for many but acquirers need to choose their targets carefully and integrate their acquisitions well,” continued Mercereau.

“In today’s challenging market, improvements in deal selection, deal governance and integration focus will significantly boost the market’s success rate and help acquirers achieve critical deal objectives, including higher returns for shareholders,” she added.

Although dealmakers have underperformed in 2017, the analysis showed the three-year rolling average performance for previous years’ acquirers remained positive at 5.0 percentage points, with longer-term performance since 2008 currently at 3.6 points.

Willis Towers Watson suggested this indicated acquirers over the long term were continuing to track “well above market indices, maintaining a strong return on completed deals”.

“These longer term figures support the proposition that, done well, deals are a robust route to corporate growth and do add value to shareholders,” said the broker.

Regionally, European acquirers with 32 deals continued to be the stand out dealmakers during an otherwise challenging fourth quarter, returning a market outperformance of 8.7 percentage points above the index compared to 3.7 points in the previous quarter.

Globally, the number of deals done has declined: from 273 to 198 in the final quarters of 2016 and 2017, respectively; and (barring a last-minute spike) from 848 for 2017 year-to-date versus 942 in the full-year of 2016.

Large, cross-sector, and slow-to-complete deals particularly struggled to add value in Q4 of 2017, Willis Towers Watson reported.

Comparably to the same period in 2016, the technology sector stood out as having “significantly underperformed” other sectors in the final quarter, lagging behind by 23.9 percentage points.

“Technology isn’t just for tech companies anymore, with half of all such M&A deals in the last three months being made by non-tech sectors,” said Mercereau.

“No company can afford to ignore the impact of technology and for an increasing number of organisations, the answer is to buy rather than build in order to acquire needed technologies, capabilities, and products and to close innovation gaps,” she continued.

“The rapid pace of tech acquisitions has pushed up prices, but this has not deterred buyers who clearly see some targets as must–have assets, even if the potential for value creation in the short to medium term is lower. Successful acquirers of tech capabilities will need a focused strategy, a tailor-made M&A process for tech targets and talent, and to build the right corporate organisation to find, execute and integrate innovative tech firms,” Mercereau added.