UK firms looking to acquire companies overseas should pay attention to global institutional investors – or risk the prospect of poorer returns, according to a new study.
Cross-border M&A deals, which are backed by investors with portfolios in the target market, post higher returns in the long-run compared to those which are not.
The results come from a study by the M&A Research Centre at Cass Business School and Credit Suisse which examined 40 large-sized (over 25% Deal Value to Market Value of Acquirer) cross-border M&A deals completed between 2002 and 2009.
It found acquiring companies, whose shares were purchased by investors with expertise in the target country, went on to outperform the FTSE All Share by 37% over two years subsequent to the transaction, compared to 14% for firms lacking support from such investors.
The results suggest investors with superior regional knowledge correctly predict the likely long-term success of cross-border M&A deals, and express their support by increasing their shareholding.
Share price returns are higher in the long-term on deals which are supported by institutional investors with expert knowledge of the target market. Specifically, a one per cent increase in investor shareholding of the acquiring company was linked to a 1.76 per cent increase in share price performance over two years.
The results indicate global investors draw on their intimate understanding of a market to assess the attractiveness of individual takeovers. This makes them a highly valuable source of information on the potential success and rewards of M&A deals.
Professor Miles Gietzmann, from the M&A Research Centre at Cass, said firms could improve their decision-making by consulting institutional investors with regional expertise.
“The support, or lack of it, from institutional investors is a useful indicator of a deal’s likely success,” Professor Gietzmann said. “Our findings suggest there may be occasions when deals can be improved by opening discussions with institutional investors with regional expertise.
“Companies that are considering a number of different regions to invest in can test the waters in advance of any specific bid by consulting investors with expertise in the region. These global investors can present a quick overall assessment of the attractiveness and viability of regional investment.”
He added the findings might also force some companies to re-think their strategies for foreign M&A deals.
“The ‘blitzkrieg’ method of entry into foreign markets conducted rapidly and in secret may therefore not necessarily be the best approach. Our findings suggest superior returns could be achieved by building a gradual dialogue between companies and investors with knowledge of a target foreign market before entering.
“Companies should recognise they have only limited expertise in assessing the potential of foreign markets, and have a lot to learn from exchanging strategic views with these types of informed investors.”
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