In This Article
- Exhibit 1: Global M&A activity in 2006 surpassed the peak level reached in 2000.
- Exhibit 2: Both cash and stock deals are doing better in the current boom than during the one that
ended in 2000.
- Exhibit 3: Both deal value added and proportion overpaying, which headed in the wrong direction during the last M&A boom, are now heading in the right one.
- Exhibit 4: Average deal premiums were around 30 percent in the late 1990s but nearer 20 percent now, helping
to reduce the proportion of overpayers
- Exhibit 5: Cash deals are better received
Audio is available for this article.
With announced merger activity approaching $4 trillion globally in the first 11 months1 of 2006, the year had already surpassed the record levels set in 2000 (Exhibit 1). That earlier boom was known not only for the number of deals completed but also for a lack of discipline and the number of deals that destroyed value for the shareholders of the acquiring companies; in fact, earlier McKinsey research shows that as many as two-thirds of all transactions failed to create value for the acquirers.2 Are shareholders doing any better this time around?
They appear to be. But there is still room for improvement.
We reviewed nearly 1,000 global mergers and acquisitions from 1997 to 2006, comparing share prices two days before and two days after each deal was announced in order to assess the financial markets’ initial reaction to the deals. Academic research has found a positive correlation between these so-called announcement effects and long-run value creation,3 so in the aggregate, announcement effects are useful in assessing trends in the ability of M&A to create value.4
From our analysis of announcement effects, we compiled two indexes of M&A value creation. The first, deal value added (DVA),...