The (M&A) buyer bump

Posted by Cardiff Garcia on Jun 20 17:29.

Here’s a trend we were vaguely aware of but hadn’t seen quantified anywhere (not that we’d been looking, to be honest):

That’s via the latest edition of Bloomberg Businessweek, and what the chart shows is that corporate acquirers are delivering impressive outperformance in their shares (relative to a market index) on the day after their purchases have been announced.

Some details from the report:

Bloomberg analyzed takeovers worth at least $200 million in which the buyer was a public company and no more than 10 times as large as the target. For each transaction it calculated the stock market return from the day before the announcement to the day after, minus the return in a benchmark stock index, to eliminate the impact of broad market movements. Last year the median share price gain for companies that announced an acquisition was 1.11 percent, the most for any full year in the study. So far this year, the figure is 1.18 percent.

The reasons for this improvement are a bit unclear to us. The article itself cites the enthusiasm shown by shareholders that companies are finding some way to grow and put their money to use, especially given their struggles to grow organically in a sputtering economy. These growth struggles also apply to target companies, and perhaps it’s keeping their selling prices reasonably attractive.

We’ll be interested to see how much longer this lasts if M&A activity keeps picking up. According to Thomson Reuters, worldwide M&A volume this year was up 43 per cent on the same period last year. FT Alphaville attended a debt roundtable this morning hosted by RBS, whose strategists were indeed confident that the ongoing cheap debt environment would continue fueling acquisitions in the second half of the year. (Which, as we’ve repeated many times, is fine for shareholders and not bad news exactly, but neither do these trends say anything good about the economy as a whole.)

But we’re unsure about the importance of this particular statistic. At the level of an individual acquisition, the first-day bump is surely meaningless next to how much economic value the acquirer can ultimately create from integrating the new company. And as far as we know, the historical record on post-M&A performance for the acquiring company is mixed.

Maybe we’re wrong about this and can safely conclude that, at the very least, the market is signaling that companies are not (yet) overpaying for their strategic buys. If we have any M&A gurus reading, we’d be curious to hear your thoughts in the comments.

Anyways, we just thought it was interesting to note.

Related links:
M&A: the markets love a buyer – Bloomberg Businessweek
Corporate balance sheets: when will the real spending begin? – FT Alphaville
Winners & Losers from the week in business – Deal Journal

This entry was posted by Cardiff Garcia on Monday, June 20th, 2011 at 17:29 and is filed under Capital markets, M&A. Tagged with , .

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