Later this month, the President elect will become President, and corporate America is looking forward to it. One of the groups particularly optimistic is the M & A industry from investment bankers to law firms to consultants. The present Biden administration has put more regulatory or guidelines before they would approve deals. The optimism is it will be easier for deals that are announced to go forward and be done.

If you are a long-term shareholder, somewhere along the line the company has made mergers, so great, some good and some terrible. Determining which is which is a hard process except when looking backwards.

In an opinion article, Robert Tattersall of the Saxon funds reviewed the new book The M & A Failure Trap: Why most mergers fail and how the few succeed. The book is written by professors Baruch Lev and Feng Gu.

Their process was to create a database of 40,000 M&A transactions from 1980 to 2022. Then they isolated 42 variables which might have an impact and did a regression analysis to which of them had any predictive value.

The authors came up with a success as defined by achieves above industry-average growth, a positive stock price return and no goodwill write-off all during the 3-year period after the date of the transaction. The authors found 75% of the transactions failed to meet expectations.

The authors started with 42 variables and brought them to 10. If you want details read the book.

The 10 are:

1. Deal size – negative and increasingly so as the size grows.
2. Buyer’s goodwill growth as a result of the transaction – less than 5% is neutral, more negative
3. Conglomerate merger – same industry is neutral, different negative
4. Hight stock percentage in acquisition payment – more than 80% is negative
5. Foreign target – domestic is neutral, foreign is negative
6. Buyer’s long term debt growth – the more debt growth, the more negative
7. Change in buyer’s return on assets over previous 3 years – could be positive or negative
8. Buyer’s market-to-book ratio – higher is better
9. S&P 500 change over previous 12 months – it is better to buy after a decline
10. Number of buyer’s acquisitions over 5 years – prior experience at integration is good

Linking to dividend paying stocks, companies that are profitable can both grow internally and externally through M&A. The ability to finance is easier when the company is profitable and sometimes shareholders hope their is a M&A to increase the value of the shares. However if 75% of M&A do not work, perhaps if your investments are involved in one, you might want to look at alternatives.

There are more questions than answers, till the next time – to raising questions.