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Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave

Sara B. Moeller, Frederik P. Schlingemann, and René M. Stulz · 2005 · The Journal of Finance, vol. 60, no. 2, pp. 757-782

Strategy & readinessValuation & diligenceAnyone who has been told that acquisitions destroy value
Why it is on the shelf. The headline number is the one people quote: acquiring-firm shareholders lost twelve cents for every dollar spent on acquisitions, a total of $240 billion between 1998 and 2001, against $7 billion of losses in the whole of the 1980s. The finding underneath is the one that matters for an owner, and it is almost never quoted.

The Institute's reading

That aggregate loss is not evenly spread. The authors find it is driven by a small number of acquisitions with negative synergy gains made by firms carrying extremely high valuations. Strip those deals out and the wealth of acquiring shareholders would have increased. So the honest reading is not that acquisitions destroy value, but that a handful of very large deals done by very highly valued companies destroyed enough value to swamp everything else in the average.

That distinction should change how a private owner receives the statistic. You are not a richly valued public company using inflated paper to buy something enormous, which is the profile the losses concentrate in. The mechanism the paper describes, where a high valuation gives management the room to make a poor acquisition, is a specific condition rather than a universal law. The useful question is whether any of that mechanism applies to you: are you buying because the opportunity is good, or because your own position currently makes it easy?

Key propositions

  • Acquiring-firm shareholders lost 12 cents per dollar spent on acquisitions from 1998 through 2001, totalling $240 billion, compared with $7 billion and 1.6 cents per dollar across the 1980s.
  • The aggregate loss is concentrated in a small number of acquisitions with negative synergy gains made by firms with extremely high valuations.
  • Excluding those transactions, acquiring-firm shareholder wealth would have increased over the period.
  • Firms that announced these large-loss acquisitions went on to perform poorly afterward.

In practice

  • When someone quotes the aggregate destruction figure at you, ask whether the deals driving it resemble yours in size, currency and valuation. Usually they do not.
  • Treat an unusually easy ability to pay, whether from a strong balance sheet or cheap capital, as a risk factor in its own right rather than as a green light.

Where authorities disagree

Read directly against Fuller, Netter and Stegemoller on private targets, and against the McKinsey argument for programmatic acquisition, both on this shelf. Those works describe smaller, repeated, privately negotiated deals; this one describes the opposite end of the market. The shelf holds both because the answer to "do acquisitions work" depends almost entirely on which kind of acquisition is meant.

Acquisition Conciergeorientation · not legal, tax or valuation advice
Happy to dig into it. What would you like to pressure-test from Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in the Recent Merger Wave: one of its propositions, how it applies to your situation, or where it disagrees with the rest of the shelf?