New Mauboussin Report: To Buy or Not To Buy – A Checklist for Assessing Mergers & Acquisitions

To Buy or Not To Buy: A Checklist for Assessing Mergers & Acquisitions

“Companies that act early in an M&A cycle tend to generate higher returns than those that act later. The first movers enjoy the benefits of a larger pool of targets and cheaper valuations than companies that buy later in the cycle. Cheap and accessible financing prompts action by buyers at the end of the cycle. So do bandwagon effects, or what Warren Buffett, chairman and chief executive officer of Berkshire Hathaway, calls the ‘institutional imperative.’”

Credit Suisse’s Global Financial Strategies team has published a new report, “To Buy or Not To Buy.”

  • Companies spend more on mergers and acquisitions (M&A) than any other alternative for capital allocation.
  • Empirical analysis shows that M&A creates value in the aggregate, but that the seller tends to realize most of that value.
  • While the market’s initial read of a deal is not perfect, there does not appear to be a bias.
  • Careful studies show that value creation is largely independent of EPS accretion or dilution.
  • Buyers see their stock rise when the present value of synergies exceeds the premium they pledge to the seller.
  • The form of financing and category can send signals about a deal’s merit.
  • We suggest answering four questions in order to assess mergers and acquisitions: How material is the deal? What is the market’s likely reaction? How did the buyer finance the deal? Which strategic category does it fall into?

Click here to read the full report.

See here for a collection of links to other Mauboussin papers.