In my extensive readings on analytical metrics of high tech mergers and acquisitions, depending on the author and the study involved, the conclusions reveal something between 62-68% of all executed transactions being dillutive to the acquiring shareholder in the long term, when all is said and done.
But is accretion/dillution a proxy metric for whether a deal was beneficial in overall long term enterpise value to the acquiring firm ? Is short term enhancement of earnings per share an appropriate "bell-weather metric" for whether a given transaction was good for the acquiring company and their shareholders? Perhaps - surprisingly - decidedly not, the research suggests.
A recent survey of corporate executives by Consulting firm A.T. Kearney found that the four most utilized metrics for evaluating possible acquisitions were:
1) EPS impact: accretive or dillutive, short term
2) Enterprise Value vs Purchase Price of target
3) P/E ratio of target company
4) Discounted Cash Flow (DCF) of target company
Yet the post-deal research done by Kearney finds that only one of these four actually correlates best to those same executives feeling a given transaction resulted in value-creation, when compared to what they paid out to close the deal (Enterprise Value vs Purchase Price).
Let's just contemplate the other three key metrics for a moment: accretion/dilution and P/E ratio, and DCF analysis. Even a cursory financial analysis of acquiring another public company involves some sort of "premium" to market price. So if the P/E ratio is more attractive than the acquiring company's "currency" (their stock) is trading at, then it must be so by a fair margin in order to absorb the premium to market pricing that will be required in the great majority of public stock acquisitions.
So let's just say that the P/E of a given deal, including the premium, is still less than the acquiring company maintains, so this would generally indicate an accretive transaction, with all else being equal.
But a careful analysis would reveal that the market is relentless in its long-term sophistication at valuing equities, so while earnings per share has risen, the "multiple" of the acquirer has been "dumbed down" to a degree by adding a lower P/E asset to their portfolio. So while the "E" has been enhanced, in an efficient market, the multiple declines.
Of course, if we switch to looking at "private" companies as targets, then a whole different set of factors play into the analysis, and much more discordant valuations emerge from different suitors based on their appraisal of, and value for, the private company's assets, technology, team, verfiable backlog and account presence, and competitive position.
Discounted cash flow is the undisputed "king" of true shareholder value, but the degree to which assumptions must be made can make the deal swing wildly in value based on issues like the beievability of a 4 year sales forecast. So cash flows which are demonstrably in the present get weighted heavily, while prospective "hockey stick" forecasts should not. Thus, the problem with using DCF in M/A analysis - it is only as good as the forward-looking assumptions it is based upon.
So what SHOULD have been the other 3 metrics that are at the top of the list for executives contemplating M/A action ? According to Kearney, they are:
1) "Core Capabilities Assessment"
2) "Realizable Synergies"
3) "Cultural 'Fit' Assessment'
The first has to do with a detailed, "bottom-up" appraisal of the skills and capability of the technical, operational, and management teams being acquired. Bringing in highly talented teams and putting them to good use on projects and programs they are well suited for is a "value creator" every time.
BUT, that assumes that such talent stays around to create that value, and that is where "Cultural Fit" comes into play, and related to that, "Integration Strategy" as well. Depending on how insistent the acquirer is that the new portfolio company "clone" the parent's systems and culture can often dictate how severe the talent-retention problem can be. If the "fit" is close to begin with, then the chances of keeping key talent on board is much higher, regardless of integration strategy, obviously. But try to (as once almost happened) merge a free-spirit culture like Apple Computer into a "blue-blood" conservative firm and culture that is IBM's ? Good luck!
The third metric, "Realizable Synergies" is intuitive. Whether those synergies are market-related, cost-related, or technology-related, any time you can create more efficiency in either creating value, or the costs of taking value to market, then there is an obvious and compelling "win" that can result in the proverbial 1+1=3 M/A transaction.
So, while accretion/dilution and market multiples clearly need to be looked at, and well understood, perhaps some of the more "soft", people-related metrics, along with a sober analysis of true synergies available, should be at least equally weighted in attempting to judge whether a given transaction is "green-lighted" for action.