Do Long-Term Shareholders Benefit From Corporate Acquisitions?

by Herb Kirchhoff

When a company makes an acquisition, the long-term benefits for shareholders of both companies vary depending on the nature of the acquisition. The benefits also vary depending on whether you're a shareholder of the acquiring company or the target company. While the short-term benefits are often obvious for shareholders, the long-term benefits are more difficult to determine.

General Findings

When an acquisition is announced, shareholders of the target company generally benefit from above-average positive. The effect on shareholders of the acquiring company will depend on the nature of the transaction. In the short term, shareholders of the acquiring company generally come out about even with no substantial gains or losses. But acquiring-company shareholders in a mutual merger agreement often experience a loss of stock value.

Five-Year Results

Over a five-year time span, completed mergers have tended to under perform compared to similar-sized companies that didn’t undergo a merger. Completed tender deals tend to do much better than similar companies not involved in acquisitions. Deals financed with cash are more likely to have positive results for shareholders, while deals financed with stock most likely will have small or no positive results. One explanation for this difference between cash and stock tenders is that stock acquirers tend to be growth companies, and management and the markets may be overly optimistic about continued growth prospects.

Exceptions to Rule

There have been exceptions to the general rule that mergers and acquisitions don’t provide substantial benefits for the acquiring firm’s shareholders. Shareholders of Berkshire Hathaway and General Electric have been rewarded even as the companies acquired diversified businesses.

Key Factors

Chances of success increase if merger and acquisition architects give adequate attention to six critical factors. They need to honestly consider how and whether synergies can actually produce cost reduction and revenue enhancement. They also must plan in advance the mechanics of integrating two disparate companies while preserving current shareholder value. And they must be diligent in investigating whether the companies’ representations are accurate. Deal makers must plan how to make necessary management changes in a way that minimizes disruption. They must also identify and resolve corporate culture issues, and communicate essential information to shareholders, employees and customers.