Abhik Sen | June 13th 2012 | @GlobalMkts
Did Facebook pay too much or too little in buying Instagram for $1 billion the other day? Pundits are divided but the correct answer, as with all mergers and acquisitions, will only be revealed long after the dust has settled on the deal. And that's the central dilemma that all company bosses face when pondering a buyout: for all the due diligence and number-crunching that precedes an M&A deal, it eventually boils down to a leap of faith.
The trouble is, even the most watertight of post-merger plans and forecasts can get waylaid by unforeseen events. Look no further than the ill-fated AOL-Time Warner merger that became a victim of the dotcom crash at the turn of the century. Why, then, does M&A remain such an attractive move on the corporate strategy chessboard? CEOs often end up plumping for M&A as the way forward when they are confronted with ever more competitive market conditions, investor pressure or idle cash reserves. You won't catch a CEO admitting it but sometimes it's just their desire to leave behind a 'legacy' that prompts them to go on a shopping spree.
The financial crisis and the squeeze on credit and liquidity that followed naturally put the brakes on M&A activity for a while. What is rather curious is how quiet it all still is on the deal-flow front. Corporate balance sheets are in pretty good nick, on the whole. Valuation gaps between buyers and sellers are narrowing, credit is on tap again in many countries and plenty of companies are sitting on mountains of cash. Yet, in a global survey conducted recently by the EIU, only 31% of senior executives said they expect their company to pursue an acquisition in the next 12 months, representing a significant drop in confidence from last year.
Why is appetite for M&A falling in an improving environment for deal-making? "Persistent market volatility, austerity measures, structural issues such as the eurozone crisis and the potential for slowing growth in emerging markets" might be some of the reasons, according to Pip McCrostie, global vice chair of transaction advisory services at Ernst & Young.
Perhaps companies have a few other reasons to be cautious, too. The National Bureau of Economic Research in the US recently carried out some complicated research to assess whether companies benefit from acquisitions or whether acquiring CEOs overbid and destroy shareholder value. It found that in M&A deals involving close bidding contests, the bidders' returns are closely aligned in the years before the contest but diverge afterwards: the company that loses out on the deal usually outperforms the winner by 50% over the following three years. You'd have to agree that's a pretty good reason for CEOs to sit on their hands at a time when the future is anything but certain.