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BEATING THE BEARS: HOW DEAL VALUE CAN BE ENHANCED

Companies with clear, expansive M&A strategy and efficient execution outperform their competitors.

KPMG Transaction Services published its global survey Beating the Bears on 2 June 2003. The report, looking at the issues surrounding mergers and acquisition (M&A) activity, demonstrates that companies with clear, expansive M&A strategy and efficient execution outperform their competitors.

The biennial survey, which was undertaken in conjunction with an independent research company, is the third in a series. The research looks at major deals completed globally during 2000-01 and consisted of two principal elements. First, 122 companies were interviewed about the motives and procedures behind doing their deal. Second, an assessment was made on whether the deals generated value for the acquiring shareholders by comparing share price performance to that of peer companies before and after the deal. The two strands were analysed to identify how the approach to deal making can influence the prospects of a successful outcome.

The survey shows that a higher proportion of deals now enhance value for the acquirer's shareholders. At 34 percent the figure is double that in the 1999 survey, and for the first time it exceeds the proportion reducing value. Indeed, if the measure is restricted to post-acquisition performance only, then 52 percent of deals can be said to enhance value, up from 36 percent in 2001.

The most common reasons for doing the deal are to protect or increase market share, or to diversify into new markets or products. These are largely expansive motives with a strong revenue focus. Companies that target, and are successful in attaining, revenue synergies have a higher likelihood of generating value for their shareholders.

Commenting on the findings of the report, Eric Chan, head of KPMG Transaction Services in Singapore, said: "Those companies that realise revenue benefits from a deal are often those most likely to enhance value for shareholders. We believe that this is because cost synergies generally offset the premium paid to vendors, whilst revenue synergies represent the incremental value for acquirers."

The KPMG survey also identifies a number of other developments in management practices. These include:

• Of the deals that enhance value, 67 percent came about as a result of management identifying a suitable target in advance, compared with 28 percent that were opportunistic or where the strategy was not clear.
• 37 percent of all respondents describe due diligence as the most important pre-deal activity, up from 25 percent in the first survey in 1999.

Mr Chan added: "Management practices of Singapore companies are becoming more rigorous and are increasing the likelihood of success. More deals are being planned and executed within a clear strategic framework focusing on the synergy benefits that will make them successful."

Summing up, Mr Chan said, "It is encouraging to see a further positive shift in the value creation story for acquiring shareholders. Taking into account the value realised for vendor shareholders the overall effect of M&A is highly positive."

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