Characteristics of M&A Deals that Create Value

The following are characteristics of deals that create value:

1. The buyer is strong: Acquirers with a high average growth rate three years before the merger will earn significant positive returns on the announcement.
2. The transaction premiums are relatively low: Acquirers earn negative returns if they pay a high premium for the target on the announcement.
3. The number of bidders is low: Share returns of the acquirer are negatively related to the number of bidders.
4. The initial market reaction is favorable: Investors will react positively to a merger they believe will add value in the future leading to an increase in share prices on the announcement.

Question

Which of the following is most likely to be a characteristic of M&A transactions that do not add value?

1. The transaction premium is 70% over the market trading value.
2. The buyer is Europe’s world’s largest supermarket chain.
3. There are only 2 bidders.

Solution

The correct answer is A.

High transaction premiums imply that the acquirer is overpaying for an undervalued target. https://thedentallounge.com If estimated synergies do not occur, the value of the combined companies will reduce.

B is incorrect. A strong buyer is a characteristic of M&A transactions that add value.

C is incorrect. A low number of bidders is a characteristic of M&A transactions that add value.

Reading 18: Mergers and Acquisitions

LOS 18 (j) Describe characteristics of M&A transactions that create value.