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Most Successful Deals: Cash Only; Below-Average P/E Ratios, According to KPMG Study

Deal Rationale and Number of Transactions Completed Also Impacted Returns

NEW YORK, Dec. 16 /PRNewswire/ -- Companies are more likely to improve shareholder value in their transactions if they finance the deals with cash and have lower than average P/E ratios, according to a study by KPMG International. The study, completed with the assistance of University of Chicago Booth School of Business Professor Steven Kaplan, found a correlation between certain deal factors and deal success.

The study analyzed 460 global corporate deals announced during 2002-2006, which measured normalized stock price appreciation at one and two year intervals. The top findings include:

  • Cash-only deals had higher returns than stock-and-cash deals, and stock-only deals;
  • Acquirers with low price-to-earnings (P/E) ratios resulted in more successful deals;
  • Those companies that closed three to five deals were the most successful; closing more than five deals in a year reduced success;
  • Transactions that were motivated by increasing "financial strength" were most successful;
  • The size of the acquirer (based on market capitalization) was not statistically significant.

"In this economy, companies need to consider all strategies that may improve their deal's success," said Daniel D. Tiemann, U.S. lead partner for the Transaction and Restructuring Services group at KPMG LLP. "While the deals studied occurred before the global crisis, the findings are so consistent with our 2007 study, it leads us to believe that certain variables have a greater impact on deal outcomes - regardless of the economic backdrop."

Similar to a 2007 survey that looked at deals from 2000 to 2004, cash deals in the current study were significantly more successful compared with stock deals after both 12 months and 24 months. Based on normalized stock returns, the average cash deal in the most recent study showed a return of 1 percent after one year, and 2.9 percent after two years. The average all-stock deal in the study resulted in a negative 5.3 percent return after 12 months and negative 9.8 percent after 24 months. Deals that were financed with both cash and stock performed between the two extremes, returning a negative 3.8 percent after one year and a negative 3.7 percent after two years.

"While the 'cash is king' mantra may be over-used today, the reality is that those organizations with the strongest balance sheets have a powerful position to not only make deals in the coming year, but to realize better returns from those deals," said Tiemann. "Those companies contemplating acquisitions should review their cash position now to improve their chances for success."

Companies with Lower P/E Ratios More Selective about Deals

The KPMG study of 2002 to 2006 deal outcomes also found that acquirers whose P/E ratios were in the lowest quartile of the study saw an average return of 4.8 percent after one year and 8.5 percent after two years. Conversely, companies with P/E ratios in the highest quartile experienced a zero percent return after one year and a negative 6.1 percent return after two years. This is consistent with the 2007 study's results.

"Acquirers with lower P/E ratios are probably not as tempted to engage in riskier deals, since their stock is relatively under-priced in the market," said Steven Kaplan, professor of the University of Chicago Booth School of Business, who helped analyze the findings. "In addition, an acquirer with a high P/E ratio may have a more difficult time increasing its value after a transaction, especially if over time its P/E reverts back to the industry mean."

However, one surprising finding in contrast to the 2007 study's results was a correlation between success and a target's higher P/E ratio. Acquirers who purchased companies with P/E ratios below the industry median saw a negative 6.3 percent return after one year and a negative 6.0 percent return after two years, while acquirers who purchased targets with P/E ratios above the median realized a negative 1 percent return after one year and a negative 3.5 percent return after two years.

Professor Kaplan explained, "It's possible that in the 2009 study, acquirers who purchased targets with high P/E ratios were buying businesses that were growing, and where the acquirer was able to achieve greater synergies. Deals reviewed in the 2007 study included deals from the dot-com era, where high P/E ratios were often associated with ventures that didn't deliver on future income expectations."

Careful Integration Still Critical to Success; Too Many Acquisitions Present Issues

And although completing several acquisitions a year may allow acquirers to develop best practices, the study revealed that acquirers who engaged in six to ten deals were less successful than acquirers who made between three to five acquisitions. Companies that made three to five acquisitions a year saw their stock price increase an average of 0.5 percent after one year and 0.1 percent after two years. This compares to acquirers who made between six and 10 acquisitions, resulting in an average negative 14.4 percent return after one year and negative 18.5 percent return after two years.

KPMG's 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. "Multiple transactions pose a heavy burden on companies, and those that close a manageable number of deals every year become accustomed to orchestrating a smooth integration," he said. "To increase the likelihood of a successful transaction, an acquirer must focus on integration issues before a deal even closes."

To view a copy of the full report, please go to:

Professor Kaplan, who earned his Ph.D. in Business Economics from Harvard University, is the Faculty Director of the Polsky Entrepreneurship Center at the University of Chicago Booth School of Business. His research and teaching focus on issues in private equity and entrepreneurial finance, corporate governance, mergers and acquisitions, and corporate finance.


KPMG LLP, the audit, tax and advisory firm (, is the U.S. member firm of KPMG International. KPMG International's member firms have 137,000 professionals, including more than 7,600 partners, in 144 countries.

Jennifer Hurson
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