Cash-only deals most successful: KPMG
23 Dec 2009
Companies are more likely to improve shareholder value in their transactions if they finance the deals with cash and have lower than average P/E ratios, according to a study by KPMG International.
The study, completed with the assistance of University of Chicago Booth School of Business Professor Steven Kaplan, found a correlation between certain deal factors and deal success.
The study analysed 460 global corporate deals announced during 2002-2006, which measured normalised stock price appreciation at one and two year intervals. The top findings include:
- Cash-only deals had higher returns than stock-and-cash deals, and stock-only deals;
- Acquirers with low price-to-earnings (P/E) ratios resulted in more successful deals;
- Those companies that closed three to five deals were the most successful; closing more than five deals in a year reduced success;
- Transactions that were motivated by increasing "financial strength" were most successful;
- The size of the acquirer (based on market capitalisation) was not statistically significant.
"In this economy, companies need to consider all strategies that may improve their deal's success," said Daniel D Tiemann, US lead partner for the 'transaction and restructuring services' group at KPMG LLP.
"While the deals studied occurred before the global crisis, the findings are so consistent with our 2007 study, it leads us to believe that certain variables have a greater impact on deal outcomes - regardless of the economic backdrop," Tiemann said.
Similar to a 2007 survey that looked at deals from 2000 to 2004, cash deals in the current study were significantly more successful compared with stock deals after both 12 months and 24 months.
