Mergers likely to boost shareholder value revealed

Mergers and acquisitions (M&As) in the communication and non-essential consumer goods sectors are more likely to derive shareholder value, a new report shows.

The report by business advisory firm KPMG also shows that the shorter the period between announcing an M&A and sealing the deal, the more likely it is that shareholder value will not hold long. The report published yesterday shows that deals in the healthcare and energy sectors are challenging to derive value post-merger or acquisition.

"This may be attributed to the inherent complexities and uncertainties within these sectors, such as regulatory changes in healthcare and the cyclic nature and long-term investment requirements in energy," the report says.

KPMG notes that these challenges in the energy sector make it a tough task to accurately assess and realise the value in the short term.

The report titled The M&A Dance: Orchestrating Synergies and Value Creation in Public Company Acquisitions notes that, in contrast, sectors with more predictable revenue streams or business models with a clear regulatory environment are likely to be beneficial to shareholders post the signing.

Such sectors include real estate, utilities, consumer discretionary and communication services. Consumer discretionary goods are non-essential goods such as beauty products, high-end fashion, and technology, where smartphones fall. "This highlights the importance of sector-specific considerations in M&A and the need for a nuanced understanding of the factors that drive value creation in different industries," the firm says. The report sought to examine the kind of value created in public mergers and acquisitions by analysing total shareholder return (TSR).

KPMG notes that total shareholder return is motivated by financial benefits arising directly from combining the two companies. These benefits include financing efficiencies, cost reductions and revenue growth.

KPMG analysed M&A reported by S&P Capital recorded between January 2012 and December 2022. The report notes that there were more than 3,000 public-to-public M&A deals valued above $100 million (Sh13 billion) recorded in that period. "Our research finds that 57.2 per cent of acquirers ultimately destroyed shareholder value," says KPMG in the report. The report notes that although many deals looked promising in the months leading up to closing - generating an average 13.2 per cent in total shareholder return above the relevant S&P sector index - total shareholder return dropped an average of 7.4 per cent in the subsequent two years.