Deloitte is helping corporate clients navigate mergers and acquisitions as they ride a surge of M&A activity as part of the economic rebound from the initial pandemic.
Last year, corporate dealmakers presided over a record $5.9 trillion in M&A activity, up 64% compared to 2020, across over 63,000 transactions, according to Refinitiv. The U.S. led the way, accounting for 82% of the deals.
This is the fourth merger wave in recent decades and likely the largest, according to Mark Sirower, U.S. leader in Deloitte’s M&A and Restructuring practice.
“This is by any measure like the biggest concentration in history, even if you adjust for much higher market valuations,” he said. “When you look at the value of big deals of over a billion in size, those doubled in 2021. Just 2% of those drove nearly 65% of the value of all deals.”
Sirower recently wrote a book, “The Synergy Solution: How Companies Win the Mergers & Acquisitions Game,” which Harvard Business Review published last month. He finds that many companies want to do M&A deals because they see their competitors doing them, but they may not have the necessary experience.
“There’s this injection of inexperience of different kinds into the market,” said Sirower. “The M&A landscape is littered with very experienced acquirers that everybody talks about, and then they do their biggest deal they’ve ever done.”
The high market valuations may be prompting some of the deals to go forward, but the timing may be wrong.
“If we’re doing diligence on a big deal and they’re now doing it at a 20, 30, 40 or 50% premium, why didn’t they do it six months ago when the standalone market valuation was 20% lower?” said Sirower. “Or a year ago when it was 25% lower? Why is it right now that all of a sudden it’s attractive at an all time high market valuation? So we start to see more reactive behavior. Something that we say to clients is don’t stop thinking about M&A, but understand that once you get involved in a deal, time is not on your side. Once a deal looks live and you’re negotiating on it, the diligence has to move fast. You could be three, four, five or six weeks away from announcing. Time is on your side when you’re making choices about what’s most important to you.”
A recent study by Deloitte found that less than 50% of M&A deals actually deliver on their promised value. Acquirers with a positive market reaction get 60% higher returns than negative reactions. During the current M&A surge, the study came up with three overarching insights: cash deals outperform stock deals, high premiums often mean lower returns, and initial market reactions are great indicators of long-term success.
Sirower did a wide-ranging study for his book, looking at 1,267 deals over 24 years. “It turns out that 60% of companies are met with initial negative reactions and 40% of companies with positive market reactions,” he said. “It certainly isn’t the case that all deals fail or 70 to 90% of deals fail. But then we went further because the question is, do market reactions matter? We divided the companies that had a positive reaction into a portfolio and the companies that had a negative reaction into a portfolio, and we tracked those over time. There are still observers that say market reactions don’t matter, in which case the positive portfolio should have trended to zero and the negative portfolio should have trended to zero. And they don’t. The positive portfolio stays positive and significant a year out. And the negative portfolio status stays significantly negative for a year out.”
One of the big takeaways from the study is what he calls “persistent spread.”
“It is companies that start positive and stay positive, delivering on their promises, versus the companies that start negative and stay negative, which is about two-thirds of companies,” said Sirower. “If you start negative, two-thirds of companies stay negative. And for stock deals, it’s even worse, it’s about 75%. But the difference in returns and peer-adjusted returns between the persistently positive portfolio and the persistently negative portfolio is 60 percentage points. It’s enormous.”
The day when the M&A deal is first announced is critical for market reaction, but due diligence is important as well. “Everything you say in your press release, your investor presentation, your conference calls and any roadshows you do subsequently, are all fodder for everyone else’s diligence: customers, suppliers, employees, regulators,” said Sirower.
Companies also need to be prepared for what they will tell their employees on the day the M&A deal is announced. “The things you say matter to employees,” said Sirower. “You’ve shaken up their world on a major deal where there might be significant cost synergies. They need answers. You’ve bumped them down their hierarchy of needs. They’re out there minding their own business, pursuing their career path and taking care of their families. And all of a sudden, they’ve got to worry whether their benefits change, do they have a job, do they have to move, or are all the systems and technologies that they’re used to using going to change? Employee experience planning that starts right at announcement day. What are the major changes that are coming? If you don’t have answers, let them know when you will have answers.”