75% M&A deals fail to create value: study

add_main_image Mumbai: Indian companies would have been better off had they not taken the acquisition path for growth. Three-fourths of the acquisitions made by local firms have failed to create substantial value from the deals and 59% of the acquirers have actually destroyed value within a year of closing a deal, according to a study by consultancy firm KPMG.

The report is released at a time when the appetite for merger and acquisitions (M&As) in India has been on a rise. In 2012, there were 639 M&A deals worth $26.4 billion, according to estimates by VCCEdge, an investment tracker, and the outlook for 2013 is positive.NextMAds

The study, titled Post Merger Success in India, was based on a survey of 750 deals conducted by listed companies in India between 2005 and 2011 to understand how successful these companies have been in creating value post-merger.

The data considered what it calls material acquisitions, where the acquisition value of a deal was more than 25% of the acquirer’s market value.

Between 2005 and 2011, Indian companies did about 1,100 deals with a total deal value of about $75

“By and large, acquisitions in India have not offered the value-add expected from them. Indian companies don’t pay enough attention to integration issues early in a deal. Global serial acquirers, however, routinely insist on a detailed synergy assessment and integration plan prior to signing,” said Varun Gupta, director, integration and separation advisory for KPMG in India.

He added that post-transaction, most people lose interest in the acquired asset and do nothing new, often letting it let it run the way it was running. “This affects the value of the acquirer.”

Globally, it is accepted that 12 months after deal completion (which may be 15-18 months after the deal was announced) are enough to gauge the success of an M&A transaction and if it will add value for the buyer’s shareholders.sixthMAds

While cultural disparity and post-integration hurdles are the most cited reasons for acquisition failure, experts say there are other factors as well. To begin with, due diligence for an M&A transaction is a time-consuming process and is often based on assumptions. “These assumptions could be misguided and may not pan out well after the deal,” said Gupta.

Often, targets from the alliance like cost savings, synergies and new roles are not communicated well. “Most Indian companies are not good at monitoring the success of these deals,” said Gupta.

Indian acquirers were more successful at acquiring and integrating domestic targets compared with outbound targets, the study found.

Outbound acquisitions by Indian companies are typically for getting access to natural resources (primarily to offset unavailability or supply side constraints in India), technology or skills (to move their Indian operations up the value chain), create scale and new international markets for their products or services and diversification into new products or markets.

“Except for access to natural resources where the key to success usually is raw material price arbitrage, in all other situations, having a clear post-merger plan is vital to success but few Indian acquirers focus on it,” the report said.

Acquirers in the manufacturing sector were found to perform slightly better than those in the services sector. About 29% of the deals in the manufacturing sector outperformed the index compared with 20% in the services sector, the report said.

For asset-heavy industries, synergies are typically in the form of complimentary products, better scale, lower cost of procurement or higher cross-sell capability. In labour intensive businesses, aligning organizational aspects, managing expectations and driving synergies is much harder, it said.

The deals in the mid-market segment of $50 million to $250 million tended to show the lowest returns. This finding seems a bit counter-intuitive, as most first time acquirers tend to be a bit cautious in the first deal by not taking on too large an acquisition.

“There will be no impact of such a trend on M&A transactions. India will see consolidations. There are numerous regional market leaders and people are embarking on their journey for expansion and growth,” said KPMG’s Gupta.

He, however, added that analysts, investors and regulators need to start holding management accountable for delivering on their pre-deal claims.

Meanwhile, Harish H.V., partner, India leadership team, Grant Thornton, said while globally there have been reports citing failures of M&As, corporations worldwide are embarking on this strategy to expand and grow.

A company’s business strategy includes continuation of growth plans, adding new product lines, geographical expansion and M&A, said Harish. “One needs to see if the other components of a corporate strategy are doing any better to measure if M&A strategy is the only one not working well.”