Written on 22 March 2013.
Professors Metais & Very
Emmanuel Métais and Philippe Very, professors of strategy at EDHEC Business School, discuss their latest position paper entitled The Participation of French Firms in M&A Waves.
In your study, you mention the capacity of French firms to anticipate M&A waves. Why is it so important to “catch the wave” at the right moment?
Anticipating M&A waves is a source of added value for companies. Joining the wave at the right moment maximises the market value of a company following the transaction. More precisely, academic studies on this topic have shown that acquirers who move at the beginning of waves are well valued by the market, with their share prices rising following their merger announcements, significantly more so than for transactions that occurred later on in the same waves. The difference in the creation of market value between early movers and late movers in a wave can be up to 8%, which represents roughly €8bn for a company such as Sanofi, for instance. The ideal moment to carry out an M&A transaction is thus at the start of an industry wave.
So, how does one in fact spot such a wave?
Over time the distribution of mergers and acquisitions can sometimes demonstrate a wave-like trend: a growth phase followed by a phase of decline. Such a wave thus forms a particular distribution of mergers and acquisitions over a given period, marked by unusual peaks, which correspond to a period where the number of acquisitions grew significantly, compared to the previous period, and then decreases in a similar fashion in the following period. Economic history is marked by periods of global M&A waves. However, waves of a smaller magnitude can also occur on a country or industry level. For example, the global retail distribution industry witnessed a wave of merger activity between 1998 and 2002: the overall transaction volume in this sector rose significantly from 1998, reaching a peak in 2000 with close to 200 transactions, and then declined until 2002. In our study, we worked with a sample of over 250,000 transactions to identify waves by industry. We used a method based on scenarios which allowed us to identify waves following a succession of random variations. We consequently identified 59 M&A waves globally and across various industries between 1990 and 2010, altogether amounting to just over 21,000 transactions.
Are French firms successful in these M&A waves?
Not really. We isolated the transactions made by the early movers, so 20% of the 59 M&A waves. The ranking of countries by early movers places Sweden on top with 27% of early movers, followed by the Netherlands, Germany and the USA (with 20% of early movers). Comparatively, the early mover rate amongst French companies was only at 14%. In other words, more than five out of every six French acquirers only invest once a wave has been triggered, thus falling into the latter 80% of the wave. The proportional difference is statistically significant for the top four countries mentioned. We can thus conclude that French companies are seldom present at the start of waves, and are more willing to follow in the footsteps of companies from other countries. Combined with findings from previous studies, this assertion indicates that, on average, French companies generate less market value upon merger announcements compared to their Swedish, Dutch, German and American counterparts.
It seems that M&A activity in the US will be back on the up in 2013. Do you think we are on the cusp of a new M&A wave?
In June 2011, the usually reliable BCG published a study entitled “Riding the next wave in M&A”, in which it was predicted that an M&A wave would occur. In fact, M&A activity decreased by 5% in 2012 compared to 2011, according to the Financial Times. And by more than 40% compared to 2007. Predicting a wave is therefore a very difficult exercise. Obviously, eventually coming out of the crisis could trigger an M&A wave; but when will this occur? In a previous study, we showed that certain indicators were excellent predictors of M&A activity. The number of transactions in the US is one such indicator, however, there are others including the rate of GDP growth, the growth rate of the money supply, or even nominal bond yields. These indicators do not carry the same level of importance in different countries, however. The number of M&A transactions in the US is a good indicator in Japan, but it is not necessarily relevant for France. The market fundamentals for the M&A space seem to be well set for 2013. However, in order to anticipate the potential advent of a wave, such data should be combined with other indicators, specific to each country.