A Shareholder Value Metric for Deal Success

The shareholder value metric for m&a success applied in the article is not of the stock price sizzle immediately after deal announcement but of the demonstrated potential of the merger to create more value for shareholders than for industry peers. The metric used is the total return to shareholders relative to an industry index during a two-to-three-year period following the deal. The measure is taken over two to three years to give the acquiring company time to demonstrate action, not just promise. The clock starts three months before the deal announcement to factor out the period of leaks and insider trading. The measure is only relevant for large transactions that would have material impact on shareholder value. It is taken relative to industry total return so that we measure management performance at the relevant individual company, and not industry trends. The sample is composed of 666 large deals done during the 1990s, consisting of: U.S. acquirers 282 transactions priced at $1 billion and over. European acquirers 200 transactions priced at $1 billion and over. Canadian acquirers 184 transactions priced at $100 million and over. The measure of success is the two-to-three-year total return of the acquirer versus the total return of a comparable industry index. Total return is composed of stock price appreciation plus dividends. In short, if a company can pay the premium, take on all the post-deal work of a major acquisition, and deliver better returns to shareholders than competitors do, that’s success. Conversely, if the company spends large sums of money (or securities equivalents) and underperforms, that’s failure. Shareholders would have been better off holding an industry mutual fund.