The Synergy Solution: How Companies Win the Mergers and Acquisitions Game. 2022. Mark L. Sirower and Jeffery M. Weirens. Harvard Business Review Press.
“Poorly planned and executed acquisitions have almost certainly destroyed far more investment value than managerial acts of fraud.”
Investors who remember massive fraud-related wealth destroyers such as Enron, HealthSouth, and Parmalat might wonder whether this statement from The Synergy Solution: How Companies Win the Mergers and Acquisitions Game is correct. Authors Mark L. Sirower and Jeffrey M. Weirens support their claim, however, with examples such as insurer Conseco’s ill-fated, all-stock 1998 acquisition of subprime mobile home lender Green Tree Financial. A year after the deal was announced, Conseco stock was down 50%. Four years later, the company filed what was then the third-largest-ever US bankruptcy petition.
Sirower and Weirens, who respectively head Deloitte’s US mergers and acquisitions (M&A) and global financial advisory businesses, also provide examples of vastly more successful deals. For instance, Avis Budget Group’s stock rose by 105% in the 12 months following the company’s announcement that it would acquire car-sharing leader Zipcar in an all-cash transaction.
For investors, the challenge is how to predict the M&A winners and losers. The authors reveal that one important clue is the stock market’s initial response to the deal announcement. In the Conseco / Green Tree case, the acquirer’s stock price immediately fell by 20%, whereas that of Avis Budget Group’s shares rose by 9% on the Zipcar news.
Those are not isolated examples. Among its extensive empirical findings, The Synergy Solution reports that in its sample of 1,267 M&A deals in the 1995–2018 period, one-year returns on acquirer stocks with initially positive returns averaged +8.4%, compared with –9.1% for those with initially negative returns. Of the acquirer stocks that rose on the deal announcement, 65.2% posted gains for the subsequent 12 months, while 57.1% of those that fell on the announcement were still down a year later.
In short, the market tends to recognize from the get-go whether a newly announced deal will ultimately add or subtract value for the acquirer’s shareholders (and for the acquiree’s shareholders, if the deal currency is stock). What accounts for this prescience? Sirower and Weirens employ case studies to present their argument: A gain is more likely when the acquirer’s management presents a detailed breakdown of plausible, expected synergies sufficient to justify the premium being paid for the target’s stock (or estimated value, in the case of a division being acquired from another company).
Conseco / Green Tree exemplified the counter case. Conseco had previously generated the S&P 1500’s highest total shareholder return over a 15-year period by rolling up 40 regional insurance companies. Management had mastered the process of immediately reducing back-office costs, making the synergies highly predictable. In contrast, Conseco vaguely described its diversification into consumer lending with Green Tree as “strategic” and not cost based. Investors did not buy the cross-selling story, and the initial 20 percent price drop proved to be prologue. (The deal’s heady 83% premium did not help.) Conseco’s stock price fell by half within a year and the company went bankrupt a few years later.
As the word “companies” in the subtitle suggests, this book’s primary target audience consists of corporate managers and directors rather than securities analysts. Nevertheless, the authors offer immensely valuable instruction on assessing from the outside whether a given M&A transaction is likely to create or destroy wealth. To make that determination, The Synergy Solution recommends supplementing discounted cash flow analysis with economic value added methods. Sirower and Weirens show how to look through the acquiree’s GAAP earnings, which are commonly used to justify the premium via multiples paid in comparable transactions. The earnings per share generated for financial reporting purposes might, for example, be overstated because of nonrecurring items or headed for a decline because of upcoming collective bargaining agreement renewals—an issue currently growing in importance in view of rising inflation. Investment organizations with sufficient resources can also conduct the sort of commercial due diligence the authors prescribe for acquirers, including surveys of participants in the merged company’s key markets.
In the course of providing these pointers, Sirower and Weirens subject traditional analyses of M&A transactions to well-warranted scrutiny. Contrary to the belief that acquisitions are sound only if they are accretive to earnings, the authors note the low correlation between accretion / dilution and market response. Much scholarly research asks whether acquisitions work best when they are in “related” or “unrelated” businesses or something in between the two. Many target companies, however, engage in a variety of businesses and consequently check more than one box. Sirower and Weirens also caution against focusing on the growth rate of the merging companies’ addressable market. The growth rate of the market that is serviceable by their combined operations might be lower.
Even as they catalogue the flaws in acquisitions that are either poorly conceived or driven by CEO egos, Sirower and Weirens stress their belief in the virtues of properly planned and executed M&A. Investors can improve their chances of separating the wheat from the chaff by employing some less-familiar tools they describe, such as shareholder value at risk and the meet the premium line. Helpful as well is the book’s calculation of the comparative performance of all-stock, all-cash, and combination deals. Considering the stakes, investors should certainly take advantage of the expertise and insights that inform The Synergy Solution.
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