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Strategic and active M&A delivers strong gains: BCG report

More value in divestitures than commonly believed.


August 31, 2012
by PLANT STAFF

BOSTON, Mass. — Companies that use M&A as a strategic tool – regularly divesting operations as well as continually searching for new acquisition targets – generally deliver superior shareholder returns, according to a new report by The Boston Consulting Group (BCG).

BCG says the report, “Plant and Prune: How M&A Can Grow Portfolio Value,” shows that although acquirers are seeing stunted returns and investors are staying on the sidelines for now, strategically prepared M&A leaders use slow days to re-evaluate each asset in their portfolios and don’t hesitate to spin off assets that others consider more valuable.

Indeed, the Boston consulting firm says recent analysis confirms that divestitures have much more potential to add value than is commonly believed.

For the past 20 years, average selling company’s earnings before interest and taxes increased by almost 7% from one year before a deal announcement to one year after.

One of the most active dealmakers, a large German industrial conglomerate, has averaged almost three deals a month since 1990, during which it has divested more than 250 businesses or divisions worth more than $25 billion in total, while making more than 400 acquisitions valued collectively at more than $40 billion.

BCG says this is one factor that has helped the conglomerate outperform the broad stock indexes since the late 1990s. Since 1996, the company has clocked annual total shareholder returns of 8.6%, compared with 6.5% for the S&P 500.

Other companies doing smaller deals also demonstrate impressive numbers. One South Korean conglomerate with a history of selling and buying businesses has shown an average of 23% since 1990.

In the US, a medical-technology company recently sold one product line and bought four businesses. Its shareholder returns have averaged 17% over the past 12 years.

BCG’s research shows that the average one-year shareholder return on deals closed within two months of the announcement is 4% higher than the returns on deals still open after 12 months.

Analysis of divestiture returns shows both sides benefit when companies or business units are spun off. The average short-term cumulative abnormal returns (CAR) for acquirers over the past two decades is 2.1%, and 58% of such deals created positive value for the new shareholders.

BCG notes that is “far higher” than the 0.7% for non divestment deals or – 0.8% for buying public companies.

For the shareholders of the selling company, the short-term CAR average was lower, but still significant, at 1.3%; some 54% of divestment deals created value for the seller.

Click here for a copy of the report.