By Emmanuel Metais, Professor, EDHEC Business School, Theseus EDHEC MBA Director and Pierre-Xavier Meschi, Professor, Université de la Méditérannée, CERAM

There have never been as many acquisitions in the history of business as there are today. In 2007, firms spent a record 4500 billion dollars on acquisitions worldwide, in spite of the sub prime crisis. Even so, there is a general consensus that the vast majority of acquisitions do not create value and may even destroy it. There are many well-known explanations for this: the cultural integration of two different, often competitive, companies is a major difficulty; or on paper the merger of two entities promises economies of scale and synergies that, all too often, do not materialise in the real world. So why do business leaders continue to invest in this form of growth if the returns are so poor? There are many possible reasons: "eat or be eaten", the importance of size in a globalised world, the ego and the economic interests of the leaders, copy-cat business behaviour, pressure from investment funds and so on. And with globalisation, the appearance of new predators from the emerging countries and the financiarization of the economy, the trend shows no sign of letting up in the medium-term. Perhaps is there a case for seeking alternative explanations and reviewing some of our fundamental beliefs. What if acquisitions are more effective than we previously thought?

It is traditional to assume that acquisitions fail. In 1987, Harvard professor Michael Porter observed that between 50 and 60% of acquisitions were failures. There have been several other studies since then, and the results have continued to support his conclusions. In 1995, for example, Mercer Management Consulting noted that between 1984 and 1994, 60% of the firms in the "Business Week 500" that had made a major acquisition were less profitable than their industry. In 2004, McKinsey calculated that only 23% of acquisitions have a positive return on investment. Academic research in strategy and business economics have taken these conclusions further, suggesting that acquisitions destroy value for the acquiring firm's shareholders, although they create value for the shareholders of the target firm, something that was confirmed by a recent study carried out by the Boston Consulting Group (2007). Of course results vary depending on the type of acquisition, the similarity of the two protagonists' industry, the international or domestic nature of the operation, etc., but the overall trend remains the same.

Does this mean that business leaders are blind? Or are they simply reckless? Research that we recently conducted (Working Paper: Mergers & Acquisitions, The Paradox) on 664 French acquisitions carried out in the United States between 1986 and 2007 appears to indicate that neither option provides the real reason. Quite the contrary, in fact.

One of the main difficulties in measuring acquisition performance lies in the assessment methods used. These methods include measuring the stock market reaction, valuing the whole entity after acquisition, abnormal returns, synergies and economies of scale, to name just the most common. However, they all lack the capacity to isolate the sole impact of the acquisition on the firm's value from the plethora of events that occur in these circumstances. When one assess the stock market reactions to an acquisition over a 180-day window, a number of other events have impacted on the share value during this period. At best these methods allow us to measure the financial markets' short-term reaction.

One of the solutions put forward by researchers is to study acquisition survival. An acquisition is regarded as successful if, over a certain period of time (generally several years), it has remained in the hands of the acquiring firm. Studies on survival confirm the previously obtained results, in other words a failure rate of between 50 and 75%. Divestment as a success criterion poses a major problem, however: if an acquisition is sold off at the end of 4 years with a large profit, can we really consider it as a failure? Obviously not.

In our research on French acquisitions in the United States, we adopted a different methodology to avoid this bias. We defined two types of acquisition divestment, in other words, failure-divestments that encompassed obvious acquisition failure situations (conflicts, integration issues, governance issues, disappointing overall performance, etc.) and strategic divestments, embarked on in line with the acquiring firm's strategic refocusing. Unlike failure-divestments, the latter generally create value. When we use this type of distinction, the acquisition failure rate falls to... 9.6%, a figure that is far removed from the generally announced failure rate.

We also looked at the impact of acquisition experience on future acquisition performance, in other words, whether prior experience enables a company to be more successful in its subsequent acquisitions? We found that experience plays a major and highly specific role in acquisition performance. Acquisition experience does not reduce the risk of failure but it does increase the likelihood of an acquisition divestment in a refocusing strategy. In other words, no matter how many acquisitions the acquiring firm has made in the US in the past, the risk of future acquisition failure remains the same. On the other hand, the more acquisitions a company has already made, particularly in the previous 3 years, the more likely it is to follow up with a profitable refocusing divestment.

These results throw new light on the question of acquisition performance. Looked at from this angle, acquisitions appear to be far more interesting growth operations than previous studies have suggested. In the final analysis, over 90% of acquisitions appear to be successful, either because they are still "in business" (something that would not be tolerated by the markets if they were not profitable) or because their divestment has led to value creation. In addition, experience seems to work in favour of successful divestment, reinforcing the likelihood of creating value in a company with recent prior acquisition experience. Perhaps, at the end of the day, acquisitions are not such a bad deal after all.