During slow economic growth, CEOs and boards often look to big M&A transactions to jump-start earnings. In 2011 so-called megadeals—transactions of $5 billion or more—grew five times as fast as the overall M&A market. But many boards remain skeptical about whether these deals deliver long-term value—a view fueled by the growing roster of failed mergers.
To see if this skepticism is valid, we analyzed 215 large mergers that took place across the globe from 2000 to 2010. We found that buyers were moderately successful, on average, with their stock outperforming the market by about 6% over two years. But behind this average was a huge dispersion: Half the deals led to long-term performance of at least 25% above or below the market.
Deals executed in down cycles actually perform better than other deals.
What distinguished the highly successful deals from the rest? Some factors are not surprising: Deals done within the buyer’s main business beat those done for diversification, and accretive deals (those projected to immediately increase the buyer’s earnings per share) outperformed dilutive deals (which lower EPS at the outset). Five findings, though, run contrary to beliefs commonly held by boards, and companies contemplating large acquisitions should keep them in mind. Our research shows that they can help differentiate transformative deals from the ones managers and investors live to regret.