Stock Deals Outperform Cash Deals, Defying Past Trends, Says KPMG Study

Deals Announced in 2008 More Successful than Those Announced in 2007

Oct 18, 2011, 09:15 ET from KPMG LLP

NEW YORK, Oct. 18, 2011 /PRNewswire/ -- In sharp contrast to previous results, acquisitions financed with stock performed better than deals financed with cash, according to the most recent M&A success study by KPMG LLP, the audit, tax and advisory firm.  

The 2011 KPMG "Common Determinants of M&A Success" study, completed in consultation with the Steve Kaplan of the University of Chicago Booth School of Business, analyzed the stock performance of 311 global deals announced between January 1, 2007 and December 31, 2008. The study examined performance one and two years after the deal announcement, defining 'deal success' as an increase in stock price.

Surprisingly, the study found that 2007 deals financed with cash declined on average 12.7 percent after one year and 9.2 percent after two years. In comparison, 2007 stock deals only declined an average of 5.1 percent after one year and increased 1.3 percent after two years.  While cash acquisitions announced in 2008 increased  an average of 1 percent after one year, outperforming stock deals which declined  an average 3.2 percent, 2008 stock deals rebounded after two years, with an average increase of 2 percent compared to just a 0.9 percent increase in cash deals after two years. This is a departure from KPMG's studies conducted in both 2007 and 2009.

"Although this year's finding diverged from previous studies, it is not that surprising to see stock deals outperform cash deals in 2007, as liquidity was cheap and easy to get, tempting companies to reach for acquisitions at higher multiples," said Dan Tiemann, U.S. leader of KPMG Advisory's Transactions and Restructuring group. "Liquidity was not as prevalent in the second half of 2008, and consequently companies reverted back to cash and past trends."

Steve Kaplan, professor of the University of Chicago Booth School of Business, also noted, "One possible explanation for the better performance of stock deals is that companies that used cash to finance their deals became more highly leveraged upon deal completion, and the higher leverage ratios may have been received negatively by the market during the financial crisis."

Apart from the results that stock funded deals were more successful, other top findings of KPMG's M&A study include:

  • Deals announced in 2008 performed better than deals announced in 2007
  • Smaller deals performed better than larger deals
  • Domestic deals returned greater value to shareholders
  • High P/E acquirers performed better than low P/E acquirers
  • Acquirers of low P/E targets who announced deals in 2008 were most successful
  • In 2008, acquirers with multiple acquisitions the prior year returned more favorable results.

On average, deals announced in 2008 saw a share price decline of 1.9 percent after one year and an increase of 2.5 percent after two years. In comparison, 2007 deals on average declined 10 percent and 6.4 percent after one and two years, respectively.

"Acquisitions consummated during the height of the financial crisis needed to demonstrate a solid business case going in, so it would make sense that deals in 2008 performed better than 2007 deals," said KPMG's Tiemann. "We also have found that in times of financial uncertainty, companies tend to perform more thorough due diligence, which may have helped the performance of the 2008 deals."

Local and Smaller Deals Fared Better

Companies that made acquisitions within their home market also realized better results than cross-border deals.  In 2007, domestic acquisitions saw their stock prices decline an average 8.6 percent after one year and 5.4 percent after two years, with cross-border deals experiencing an average decline in stock price of 9.1 percent and 9.2 percent after one and two years, respectively.

The results were more pronounced in 2008; domestic deals saw an average increase in stock price of 0.3 percent and 6 percent after one and two years, respectively, while cross-border acquisitions suffered an average drop in prices of 9.6 percent and 10.1 percent during the same time periods.

"Although companies are showing an increased interest in cross-border deals, the finding that home markets acquisitions fared better seems to highlight the greater complexities of integrating a global acquisition, where cultural and geographic challenges are more prevalent," said Tiemann. "However, regardless of whether the deal is domestic or global, when acquirers consider post-merger integration issues early on – even before a deal is signed – they are in a better position to realize synergies sooner. This in turn can lead to increased shareholder value."

The KPMG study also found that smaller deals, which are also typically easier to integrate, fared better. In 2007, companies whose deals were in the lowest quartile based on transaction size saw their stock price decline an average of 10.6 after one year, and 8.6 after two years. In comparison, the deals in the highest quartile saw an average decline of 12.4 percent and 8.9 percent after one and two years, respectively. In 2008, smaller deals performed even better, with an average decline in stock price of 1.5 percent after one year and an increase of 8.1 percent after two years. In comparison, the largest deals in 2008 had an average drop of 2.5 percent after one year and increase of 6.7 percent after two years.

For a copy of the 2011 KPMG report, please click here.

Professor Steve Kaplan, University of Chicago Booth School of Business

Professor Kaplan, who earned his Ph.D. in Business Economics from Harvard University, is the Neubauer Family Distinguished Service Professor of Entrepreneurship Finance at the University of Chicago Booth School of Business.  His research and teaching focus on issues in private equity and entrepreneurial finance, corporate governance, mergers and acquisitions, and corporate finance.

About KPMG

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. We operate in 150 countries and have 138,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such. KPMG International performs no professional services for clients nor, concomitantly, generates any revenue.


Jennifer Hurson