Thursday, January 29, 2009

Comparison of M&A activity during bull & bear markets

In my blog on April 29, 2008 ("Post-takeover announcement plays"), we looked at the results of buying the stock of companies that are being acquired on the date of the takeover announcement. We saw that out of 62 companies that announced takeover bids between March and July of 2007, fifty-seven of the deals were successfully completed, two had failed, and three had not closed as of the time of writing. (I haven't gone back to the original data to see what happened to these last three deals.) The average return was 2.9% and the average holding time was 2 ½ months, giving an annualized return of 8.7%.

These data were collected during the last phase of the recent bull market, and I was wondering what, if any, differences there would be between M&A data collected in bear markets. To that end, I looked at 36 takeovers collected between the end of June through the end of last December. (I tried to collect every takeover that I saw, but I'm sure my list is probably not complete.) The data is summarized in the table below. (Click to enlarge.)

[Note: The price of the stock on the date of the merger announcement is the closing price of the day.]

Of these 36 M&A deals, eight are still pending and only three have fallen through so far (the ones highlighted in the table), although we might have to add Rohm-Haas (ROH) to this list shortly. You can see that in two of the three failed deals (BXG and LNY) investor skepticism was reflected in the post-announcement stock price resulting in unusually high expected returns. A high expected return should be a signal to investors that the deal could be on shaky ground. You can see that it was these three deals that turned what would have been a positive overall return into a slightly negative one, but still much better than the S&P 500 which was down almost 40% over the same period. (Without these three failed deals the total portfolio return would have been 4.3% +/- 4.0%.)

It is reasonable to expect M&A activity to be sharply curtailed during times of lean credit and that, too, is born out by the data. During the bull market sampling period, M&A activity averaged about a dozen deals per month; during the past half year that figure was cut in half.

One thing that did remain the same, however, was the average length of time between announcement of the acquisition and deal close—two and a half months with a standard deviation of a month.

To me, the most remarkable statistics are the fact that although we've been in a ferocious bear market with tight credit for the past half year especially, deals were made with a surprisingly smaller number of failures than I would have expected. Hopefully, President Obama's plans to revive the economy and free up credit will stimulate an increase in M&A activity.

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