Companies looking to improve shareholders value through acquisitions should finance their deals with only cash rather than stocks, as such transactions are seen to provide higher returns, a study by global consultancy KPMG International says.
The KPMG study completed with the assistance of University of Chicago Booth School Business Professor Steven Kaplan, found a correlation between certain deal factors and the success of the transaction.
The key findings of the study revealed, 'cash-only deals had higher returns than stock-and-cash deals and stock-only deals.'
"While the 'cash is king' mantra may be over-used today, the reality is that those organizations with strong balance sheets have a powerful position to not only make deals in the coming year, but to realize better returns from those deals," KPMG LLP US lead partner for transaction and restructuring services group Daniel D Tiemann said.
The cash deals studied were significantly more successful compared with stock deals after both 12 months and 24 months.
Based on normalised stock returns, the average cash deal in the study showed a return of one per cent after one year, and 2.9 per cent after two years. In contrast, the average all-stock deal resulted in a negative 5.3 per cent return after 12 months and negative 9.8 per cent after 24 months.
Deals financed with both cash and stock performed between the two extremes, return to a negative 3.8 per cent after one year and a negative 3.7 per cent after two years.
"Those companies contemplating acquisitions should review their cash position now to improve their chances for success," Tiemann added.
Moreover, firms that closed three to five deals a year were the most successful, while completing more than five deals in a year reduced the success, the study said. Companies that made three to five acquisitions a year saw their stock price increase at an average of 0.5 per cent after a year and 0.1 per cent after two years.
In comparison acquirers who made between six and 10 acquisitions, resulting in an average negative 14.4 per cent return after one year and negative 18.5 per cent return after two years, the report added.
Tiemann noted that trying to integrate several acquired companies at once can cause confusion around processes, reporting structures, IT issues and even distract employees from the business strategy.
The study also stated that transactions that were motivated by increasing 'financial strength' were the most successful. However, the size of the acquirer firm (based on market capitalization) was not statistically significant.
