Friday, 17 December 2010

The stock market generally hates acquisitions, but here is an exception to the rule

In about 70 percent of the cases, the stock market responds negatively to the announcement of an acquisition. Put differently, despite their popularity, the average take-over destroys value for the acquiring firm. There are literally hundreds of good academic studies that consistently show that effect. For long, it was actually quite impossible to find any category of acquisitions that defied this rule and made some money, but lately a few studies have started to emerge that identify types of acquisitions that are seen in a more positive light by the ever elusive stock market.

One such sub-sub-subcategory of acquisitions that do appear to make at least a little bit of money are international acquisitions that were preceded by an alliance between the merging firms, especially if it was a strong form of an alliance, i.e. an R&D or Marketing alliance or prior buyer-supplier relationship (rather than a mere equity stake or licensing agreement). I know, it sounds like a very very specific category but I am already glad we have at least found one.

Although such alliances-turned-acquisitions are pretty rare – as evidenced by research by professor John Hagedoorn from Maastricht University – there are examples of firms doing it that way consistently: Cisco is well-known for turning dozens of small equity alliances into full-fledged take-overs and also Heineken has been using this incremental approach over the years with much success, consistently first cooperating with local breweries before fully acquiring them.

And in a way I find it understandable why, although rare, this type of acquisitions has a pretty decent track record. Acquisitions are just very hard to do. They usually are fraught with information asymmetries; basically most firms don’t have a clue what they’re buying. And due diligence is not going to solve that problem; acquisition integration is often hampered by cultural differences, incompatible systems and plain mistrust – something you don’t just look up in the company’s books beforehand. Hence, the troubles are hard to avoid.

But a preceding alliance might actually do that trick for you. Having lived through a lengthy alliance before the deal (“a lat relation before moving in together”) will have reduced these information asymmetries and unfamiliarities while, crucially, in the process, may well have bred some much needed trust. Because trust is definitely what you require abundantly when merging households (although precisely then, it often is in short supply…).

Professors Aks Zaheer, Exequiel Hernandez and Sanjay Banerjee from the University of Minnesota examined such alliances-turned-acquisitions and assessed how the stock market responded to their announcements. Let’s say it was a weak “yes”: unlike the average take-over, the stock market had a weak but positive appreciation of these types of deals. Where the stock market usually responds negatively to an acquisition, they found that if the take-over was preceded by an alliance between the firms, the share price of the acquiring firm increased after the take-over announcement.

This results was really only true though (i.e. “statistically significant”) if it concerned an international acquisition. And in a way I find that understandable, because the issues of information asymmetry, cultural differences, and mistrust are clearly aggravated in the case of a cross-cultural merger. Hence, in these cases, a prior alliance proves particularly helpful.

So, see, there is a glimmer of hope after all, for the track record of M&A. All it needs is a bit of patience and fidgeting around before engaging in the real thing.

1 comment:

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