Opportunities and challenges of value creation trough M&A in cyclical economies

Karolis Andriuskevicius

Abstract


Statistical data suggests the rather marginally steady increasing total number and volume of M&A worldwide. However, it remains an open question whether M&A are value increasing or decreasing activities as majority of economic research suggests that target companies earn significant positive returns, bidders earn on average zero adjusted return, and that combined entity earns marginally positive returns. These findings raise managerial dispute about rationale of M&A. The paper supports the stance that M&A can create value and deliver above-average returns to stakeholders throughout the full economic cycle. Literature review suggests that announcement returns in the short term are significantly better for M&A announced during economic expansion. However, it is being confirmed that acquirers buying in expanding economy (high-valuation markets) significantly underperform relative to acquirers buying during shrinking economy (low-valuation markets) in the two years following the acquisition (long term). During economic downswings value-gain opportunities potentially arise from reduced competition, less inflated deal valuation multiples and bidders disposing sufficient cash and high profitability levels to execute and lead the deals. Furthermore, deals executed during downswing period increase the likelihood of the acquirer unlocking fundamental value of acquiring entity trough operational improvements. To sum it all up, it is noticed that economic cycles expands a playing field for acquirers to create value through M&A. It is being hypothesized that deals executed during downswing period potentially create greater value in the long run in comparison with deals done during economic upswing periods.

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