As seasoned finance professionals and/or seasoned followers of finance, Alphaville readers may know that companies with an aggressive record of merger and acquisitions tend to perform poorly over time.
Supporting this is anecdotal evidence. Everyone should be familiar with the stories of roll-ups that have fallen apart when the music stopped: think of Pharma-gouger Valeant, Telco bubble pin-up WorldCom or collapsed UK government outsourcer Carillion.
But there’s also the academic evidence. A 2016 analysis of 2,500 deals found that 60 per cent of them destroy shareholder value, according to Harvard Business Review. The problem is particularly acute in big firms, according to a 2003 paper by Moeller et al, which found that takeovers in the preceding 20 years had destroyed some $226bn of shareholder wealth.
For investors who like to bet stocks are going to fall, this evidence also provides a good guide to which companies might underperform in the future.
So it was with some interest we opened the Friday Views email from Jules Hull of independent equity research firm Stockviews, who has taken the courtesy of crunching the figures for us in the UK.
Here’s how the FTSE 350, plus Aim stocks with a valuation of over £100m, chart when comparing their three-year total ebitda versus their acquisition spend (ie cash in and cash out) and their total returns over the same period:
So, in general, the principle has held: the majority of companies who have spent big on acquisitions, relative to their profits, have seen their stocks go nowhere.
Yet there are also a few outliers, such as £1.3bn Future PLC, the digital publisher, and Learning Technologies Group, a growing £910m provider of online learning and talent management for corporates. Maybe these wonder kids of M&A have managed to find the secret sauce that has alluded so many others? Or maybe not.