New BCG Study Identifies Major Trends That Will Continue to Drive M&A Through Volatile Financial Markets



    Despite Near-Term Slowdown in Deal Making, Most Sectors Expected to Keep
    Consolidating as Private Equity Firms Remain Influential Players

    Report Shatters Several M&A Myths and Sheds Light on Keys to Success in
    Increasingly Tough Market

    BOSTON, Aug. 15 /CNW/ - One of the largest-ever studies of mergers and
acquisitions (M&A), conducted by The Boston Consulting Group (BCG), identifies
several trends that will continue to drive high deal flow, albeit at a reduced
rate, through current volatility in the global financial markets.
    The study, published in a new BCG report entitled The Brave New World of
M&A: How to Create Value from Mergers and Acquisitions, is based on a detailed
analysis of more than 4,000 completed deals between 1992 and 2006. It is
believed to be the largest nonacademic study of its kind.
    "We are seeing a return to normalcy, which is healthy," said Jeff Gell, a
Chicago-based partner and coauthor of the report, upon its release. "Prices
and leverage will come down slightly, but volumes will remain high as the
strategic need for most deals is still present. Companies are still sitting on
excess cash that they need to deploy, and private equity funds still have
large war chests that they need to put to work."

    
    Among the major trends identified:

    Global Consolidation Is Accelerating

    -  Consolidation deals as a portion of the total value of transactions
       leapt from 48.7 percent in the period 1999 to 2000 to 71.4 percent
       last year. Globalization, more liberal regulatory environments, and
       ample funds for M&A will continue propelling this trend.

    Private Equity Is Playing a Growing Role

    -  Private equity firms' share of the total value of transactions has
       leapt from 6 percent to 24 percent (1996-2006). In absolute terms, the
       total value of PE deals soared from $160 billion in 2000 to $650
       billion in 2006.

    Developing Markets Are Helping Fuel the Boom

    -  The Americas account for the largest share of deal value (46.5
       percent), but Europe has drawn closer (29.5 percent). Between 2002 and
       2006, China's and India's deal value grew by 20.4 percent per year.
    

    The study also explodes a number of myths about M&A. Among the contrarian
findings:

    
    Private Equity Is Winning by Paying Less

    -  It's commonly assumed that PE firms have gained an increasingly large
       share of the M&A market by using their huge reserves of capital to pay
       over the top for targets. But BCG's analysis indicates that, on
       average, PE firms pay lower multiples and lower acquisition premiums
       than "strategic" buyers. One of the reasons why PE firms appear to pay
       less, on average, is that they tend not to bid for targets in
       industries where there is strong consolidation logic and where high
       multiples are commonly paid, so their average multiples are less
       influenced by large, individual multiples than those of strategic
       buyers.

    Higher Acquisition Premiums Do Not Necessarily Destroy Value

    -  Between 1992 and 2006, value-creating deals had a 21.7 percent
       premium, on average, compared with an 18.7 percent premium for non-
       value-creating transactions. Paying higher premiums appears to be
       especially valuable during periods of heightened activity (such as
       now). Acquirers that pay larger premiums have destroyed less value
       during these periods.

    Bigger Isn't Necessarily Better

    -  Deals over $1 billion destroy nearly twice as much value on a
       percentage basis as deals below $1 billion. And deals destroy
       progressively more value as the size of the target increases relative
       to the size of the acquirer. Targets worth more than 50 percent of the
       value of the acquirer destroy twice as much value on a percentage
       basis as targets worth less than 10 percent of the acquirer.

    It Doesn't Always Pay to Be Friendly

    -  Hostile deals are viewed significantly more favorably by investors in
       today's market than they were in the preceding wave of M&A (1997-
       2001). This could be because most deals since 2002 have been
       consolidation mergers. Establishing a harmonious relationship with the
       target tends to be less important in this type of M&A because the
       primary goal is usually to realize cost synergies through
       rationalization, as opposed to growth synergies by teaming-up
       capabilities.

    M&A Often Creates Substantial Value

    -  Although 58.3 percent of deals between 1992 and 2006 destroyed value
       for acquirers, with a net loss of 1.2 percent for all transactions,
       the average deal produced a net gain to shareholders of 1.8 percent
       when returns of the targets are taken into account. Moreover, the
       majority of deals (56 percent) created value for the combined set of
       shareholders. In addition, acquirers in several industries, including
       automotive and retail, created value, on average, as did acquirers in
       the Asia-Pacific region.

    Cash Is King

    -  Cash-only transactions have a much more positive impact on value than
       deals that rely on stock, a mix of stock and cash, or other payment
       contributions.
    

    The authors point out that in today's M&A environment, sitting on the
sidelines holds risks as well. It not only exposes a company to the threat of
a hostile bid, it also gives rivals the opportunity to snatch prime targets
and gradually erode the company's competitive position.
    "In consolidating industries, joining the brave new world of M&A may be
the only way to survive - eat or be eaten," said Alexander Roos, a
Berlin-based partner who coauthored the report with Gell, Kees Cools in
Amsterdam, and Jens Kengelbach in Munich. "To avoid becoming prey, companies
need to raise their game and adopt a much more professional and systematic
approach to M&A."

    
    Among the authors' recommendations:

    -  Professionalize M&A like any other industrial process, with a strong
       strategic logic and a rigorous post-merger integration, formulated
       before a deal is concluded

    -  Conduct a high-resolution valuation of prospective targets, including
       assessing the costs of not doing a deal

    -  Learn from private equity, including the possibility of leveraging up
       with greater debt
    

    About The Boston Consulting Group

    Since its founding in 1963, The Boston Consulting Group has focused on
helping clients achieve competitive advantage. Our firm believes that best
practices or benchmarks are rarely enough to create lasting value and that
positive change requires new insight into economics and markets and the
organizational capabilities to chart and deliver on winning strategies. We
consider every assignment to be a unique set of opportunities and constraints
for which no standard solution will be adequate. BCG has 64 offices in 38
countries and serves companies in all industries and markets. For further
information, please visit our Web site at www.bcg.com.




For further information:

For further information: To receive a copy of The Brave New World of
M&A, or to schedule an interview with one of the authors, please contact
Dorenda McNeil at (416) 300-0269 or mcneil.dorenda@bcg.com

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