Shareholders are getting something of a better deal in the current M&A boom than they did the last time around. Indeed, our research suggests that 2006 came close to a ten-year high as measured by the value (as a percentage of deal activity) that takeovers created for shareholders. But with no end in sight to the spending frenzy, boards and managers will need to demonstrate steady nerves if their newfound discipline is to hold. Signs that it’s being tested are already evident.
To gauge trends in the value being created through M&A, we reviewed nearly 1,000 global mergers and acquisitions, valued at more than $500 million, that occurred from 1997 to 2006. By examining stock price movements shortly before and after each deal was announced, we were able to assess how financial markets viewed its worth. While such “announcement effects” are by no means a perfect measure, academic research has shown them to be a good indicator of long-term value creation.1
Our analysis shows that the value created by deals in the current M&A boom (2003 to 2006), for the buyer and the seller combined, averaged some 6 percent of the transaction value. This figure contrasts starkly with the...