Three out of four local companies strike out short term post merger

A RECENT survey by KPMG has given investors cause for caution with regard to takeover script offers.

A cautious approach also was recommended for mergers, which would not necessarily bring an automatic cash windfall, the survey added.

Findings from the KPMG survey released last week indicate that only one in four Australian companies that recently completed a merger or acquisition actually created shareholder value in the first year after the deal.

Shareholders left feeling undone have been quick to point the finger at their directors for any perceived wrongdoings, as BHP Billiton chief executive Paul Anderson, still trying to convince shareholders of the benefits of BHP and Billiton merger months after the deal, was completed, is finding out.

The survey also indicated that Australian mergers created less shareholder value than overseas mergers.

Assuming the rationale of an investment is to maximise shareholder wealth, the survey found only 25 per cent of companies that made an acquisition created wealth. Incredibly, 59 per cent of companies suffered an erosion of shareholder value, while for 16 per cent of companies the merger made no difference.

The KPMG Transaction Services Study focused on 73 Australian domestic deals completed in the year to September 2000 and tracked the share price performance of the acquirer companies over the following year.

Companies that performed better than their sector were deemed to have created value even if the industry sector had declined, while those that performed worse than the sector average were deemed to have destroyed value.

Explaining the results, KPMG Transaction Services national partner David Nott said the study confirmed suspicions that acquirer companies often failed to deliver the claimed rewards of a merger or acquisition, at least in the first year after the deal.

“In some cases, the market is sceptical a year after the event that the deal will sufficiently enhance earnings, although in the longer term it may be successful,” Mr Nott said.

“In other cases it may be a perception that the price paid was excessive.”

Mr Nott believes the reason Australian companies on average performed worse post merge and acquisition than companies internationally may be partly explained by the smaller average deal size and more vigorous due diligence.

“The UK and US surveys focused on large, cross-border transactions, which are generally subject to intense due diligence,” he said.

“Shortcomings in strategy, operational fit and ultimately the pricing of a deal are more likely to be detected in larger deals, which flows through into higher likelihood of deal success.”

However, Mr Nott feels that these better transaction management practices, including the appointment of a senior executive to manage a deal through the entire life cycle, should lead to increased rewards for shareholders. We now see companies report to the market the expected synergies from a transaction and then provide periodic feedback as to the achievement of those targets.

“This is a very positive trend and, based upon what I am seeing now in the market, I am confident our next survey in two years will show a significant improvement in the proportion of deals that create wealth for shareholders,” Mr Nott said.

Global takeover activity dropped for the first time in eight years during 2001 as the US recession and the September 11 terrorist attacks took their toll. A survey by Ernst & Young indicates that mergers and acquisition market fell by as much as 50 per cent.

Ernst & Young corporate finance Perth head Martin Alciaturi is predicting it could take at least another six to 12 months before confidence is restored to previous levels.

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