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In brief
Despite a dramatic decline in deal volume from 2022-2023,ᶦ new EY research reaffirms that mergers and acquisitions (M&A) remain one of the most potent means of improving total shareholder return (TSR) and enterprise value (EV), even during periods of economic uncertainty.
This updated analysis validated results from prior EY studies finding a strong positive correlation between M&A and EV and TSR. In the latest EY analysis, outsized growth in EV and TSR was realized by active buyers of all sizes and sectors. The same trend was also observed when isolating results from 2020-2021, the period most impacted by the global COVID-19 pandemic.
The analysis used TSR and EV growth as the key metrics to assess overall company performance. The analysis examined all public company M&A activity globally during a four-year period from 2019-2022, with some limited adjustments where information was incomplete or significant outliers existed from peer medians. The resulting dataset included nearly 8,000 public companies and 23,000 M&A transactions, spanning 11 industries, across all major geographies.
The study also evaluated TSR performance and changes in EV based upon company size, industry, geography, frequency of M&A activity and cross-border transactions to identify potential differences. It categorized M&A frequency into three cohorts over a four-year period from 2019-2022:
The analysis, which updates a prior study of 2015-2019 data, shows that active buyers on average realize consistently greater value creation than do non-buyers and infrequent buyers. Active buyers – the vanguard of M&A – consistently outperform their counterparts in EV and TSR growth. On average, active buyers achieve an enterprise value roughly 3x higher than non-buyers and 1.6x higher than that of infrequent buyers.
The trend appears similar in TSR growth, with active buyers realizing TSR roughly 2x higher than non-buyers. The correlation appears slightly less pronounced when comparing TSR growth for non-buyers vs. infrequent buyers. This is hardly surprising, since M&A activity is often a catalyst that directly – and disproportionately – influences changes in EV. Total shareholder return, however, is often impacted by a confluence of other factors outside managerial control, including sector-specific growth, structural economic trends and monetary and fiscal policy.
Figure 3 below illustrates a clear trend: the more acquisitive a company, the more remarkable its growth. Whereas non-buyers exhibited relatively stagnant growth during the four-year analysis period, active buyers experienced significantly higher EV and TSR growth rates. As deal-making intensifies, each successive “block” of five acquisitions further propels EV and TSR growth by an incremental ~235 basis points, on average.
Many may remember from statistics class that a high correlation does not prove causation. This was true in business school, and it is true here. However, the analysis clearly indicates a strong, consistent pattern of TSR growth correlated with frequent acquisitions.
Viewed through a different lens, transactions were analyzed by buyer size and grouped into three categories based on revenue:
There is again a clearly observable trend in both EV and TSR growth when adjusting for company size. Medium-size companies maintain the most pronounced gap in EV and TSR growth between active buyers and non-buyers.
The only departure from this trend is observed in firms with less than $100m revenue, as shown in Figures 4 and 5. One hypothesis is that smaller companies which acquire more than five acquisitions during a four-year period may lack the scale and resources to drive effective operational integration. This lack of integration could minimize deal synergies and ultimately limit growth in EV and TSR during the subsequent two to three years. It is also observed that infrequent buyers carry higher average leverage (4x) than active buyers, potentially constraining their liquidity and limiting EV growth.
The analysis also examined TSR and EV growth based on the acquirer’s primary industry focus, again comparing non-buyers, infrequent buyers and active buyers. Consistent with the findings from our prior analyses, active buyers created significantly more value than infrequent and non-buyers across all 10 major industry classifications.
Average EV growth for active buyers during the period was 4.54% vs. only 0.74% for non-buyers. Active buyers in the Communications sector experienced flat EV growth during the analysis period. However, this flat growth far outpaced the negative growth rates experienced by infrequent and non-buyers. The gap in TSR growth between infrequent and active buyers is slightly less pronounced in the Energy, Financials and Health Care sectors. Again, this is likely attributed to the myriad different economic and policy-related factors that often influence TSR.
Trends in EV and TSR growth by sector can be viewed in Figures 6 and 7.
Findings for individual sectors do differ marginally when compared to the prior analysis period (covering 2015-2019). For example, the EV trend in the Industrials sector – notably between infrequent and non-buyers – appears slightly less pronounced in this latest version of the analysis. This could be explained by underlying subsectors, such as Chemicals and Materials, which experienced significant structural headwinds during the COVID-19 pandemic. These subsectors have witnessed a relatively slower recovery of both EV and TSR to pre-pandemic levels, which may have flattened the performance curve between infrequent and non-buyers.
Another notable observation is the lack of TSR variance between all cohorts in the Technology sector. This lack of variation may be explained by the higher-than-average equity trading multiples that exist in various Technology subsectors, particularly Semiconductors and Software. For example, as of September 2023, the Semiconductor and Software sectors were trading at a significantly higher price-to-earnings (P/E) ratio – roughly ~34.00x – vs. the broader S&P 500 (~23.50x).ᶦ This average trading “premium” within the Technology sector – when compared to other industries – may soften the impact of acquisitions more broadly on TSR.
When conducting the same analysis to assess M&A value creation by region, where acquirer and target operated in the same region, a clear linear trend is observable. The difference in both EV and TSR growth – across regions – is clearly pronounced.
In the Americas and APAC regions, we see a wide gap in EV performance between active buyers and non-buyers. Deal-making in these regions was driven primarily by the Industrial Products, Technology and Healthcare sectors. In Europe, active buyers achieved only modest EV growth during the study period; however, they still outpaced the negative returns of infrequent and non-buyers.
While the updated EY research clearly shows that M&A activity drives excess growth in EV and TSR, strong execution remains critical to success. There are four ways that companies can drive value through M&A:
1. Follow strategy-driven discipline – Successful M&A begins with identifying the “right” target that closely fits a buyer’s growth strategy. In essence, it’s critical for companies to pursue the right deals at the right time, based on clearly defined strategic priorities and long-term growth plans. Successful buyers tend to be highly disciplined executives who resist succumbing to “deal fever.” In addition, management should define clear, measurable objectives for what they hope the acquisition will achieve. Examples often include access to new markets and distribution channels, creation of new and innovative technical capabilities, the addition of differentiated skills and expertise, and scale-related cost advantages.
2. Perform due diligence and synergy estimation – Two key factors often observed in failed M&A transactions are the underestimation of costs and overestimation of synergies. Once a target has been identified, it is imperative to develop a sound understanding of its business, operations, industry and competitors. Estimating all one-time costs, synergies and dis-synergies is also critical to effectively value a target. Experience from frequent acquisitions helps to improve the estimation process. Furthermore, frequent buyers understand clearly when a target’s valuation no longer generates an attractive return for shareholders. Executives may need to be willing to potentially walk away or renegotiate the price when a strategic transaction’s deal economics no longer make sense.
Deal synergies and costs should be quantifiable and measurable over time. For example:
3. Execute effective M&A integration – It is important for the integration program to be detailed and transparent to promote efficient decision-making and rapid execution. Companies can clearly define how they plan to achieve synergies and how the combined business will be run to enhance value. Strong governance may need to be in place so that different vertical leaders are aligned with the deal objectives and work toward effective integration.
The M&A integration approach further involves selection of an effective management team, efficient internal and external communication, and management of cultural change. The decision to retain or rationalize acquired managers, and the eventual rebalancing of an acquisition’s management team, also play an important role in the success of an integration. Similarly, effective communication with investors can help build positive sentiment and enhance shareholder value.
Other common themes of successful M&A integrations include:
4. Develop robust M&A processes and roadmaps for the future – Active buyers establish strong foundational capabilities to sustain consistent, repeatable M&A activity. This typically involves developing playbooks and building teams of highly skilled M&A professionals to execute future transactions. Such teams generally include a mix of internal executives and external advisors.
Our updated analysis challenges the myth of M&A’s waning influence, underlining its enduring significance in boosting shareholder returns and enterprise value. The research clearly indicates that more frequent M&A activity by companies of all sizes can boost enterprise value and shareholder return. To be successful, companies can consider key factors that contribute to successful M&A transactions, such as a disciplined approach to due diligence and deal integration. Armed with a clear vision, meticulous planning and a strategic approach to integrations, companies can emerge from any economic storm with elevated TSR and EV.
Shane O’Neill and Jatin Lohmorh of Ernst & Young LLP contributed to this article.
The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
Amidst economic uncertainties and dwindling deal volume, new EY research reinforces the resilience of M&A as strategic tool to amplify shareholder returns and bolster enterprise value.
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