Masters of the Deal: does M&A create shareholder value? The strategies of Excellent Corporate Portfolio Managers

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1 Masters of the Deal: does M&A create shareholder value? The strategies of Excellent Corporate Portfolio Managers A research study by the M&A Research Centre at Cass Business School and Intralinks Philip Whitchelo VP Strategy & Product Marketing, Intralinks Copyright Intralinks 2015 All rights reserved 13

2 Notice This document contains information that is proprietary and is the property of Intralinks Inc. It may be used, distributed and reproduced only in its entirety or, if only part of the information contained herein is used, distributed or reproduced elsewhere, then this use, distribution or reproduction must be accompanied by this notice. Copyright Intralinks 2015 All rights reserved 14

4 Does M&A deliver shareholder value? Extensive prior studies showing strong positive effects for targets and negative effects for acquirers but, previous studies have focused on measuring value creation from individual deals, not firms overall programs of M&A activity over longer time periods This study analysed the performance of 25,000+ global firms and 265,000+ deals over 20 years Copyright Intralinks 2015 All rights reserved 16

Measuring firm performance from M&A M&A frequency per 3 year rolling periods Extremely active (6+ deals) Very active (3-5 deals) Active (1-2 deals) Firm performance = CAGR in total shareholder return

5 Measuring firm performance from M&A M&A frequency per 3 year rolling periods Extremely active (6+ deals) Very active (3-5 deals) Active (1-2 deals) Firm performance = CAGR in total shareholder return adjusted by local country benchmark total return index Young (0 to 3 years) Medium (3 to 10 years) Mature 10 years+ Firm maturity since first public listing Copyright Intralinks 2015 All rights reserved 17

acquisition frequency and returns for young firms Annual total return vs.

6 Key finding #1: buy while you re young Young firms (during their first three years as public companies) only outperform the market when they make at least two acquisitions per year Relationship between acquisition frequency and returns for young firms Annual total return vs. market (pp) YOUNG FIRMS ACQUISITIONS All Inactive Active Very active Extremely -2.4 active Copyright Intralinks 2015 All rights reserved 18

Key finding #2: as you get older keep buying Medium-aged and mature firms increasingly outperform the market the more frequently they acquire Annual total return vs.

7 Key finding #2: as you get older keep buying Medium-aged and mature firms increasingly outperform the market the more frequently they acquire Annual total return vs. market (pp) Relationship between acquisition frequency and returns for medium-aged and mature firms OLDER FIRMS ACQUISITIONS 0.6% 0.2% 1.0% 2.7% 3.4% All Inactive Active Very active Extremely active Copyright Intralinks 2015 All rights reserved 19

market (pp) Relationship between divestment frequency and returns for medium-aged and mature firms OLDER

8 Key finding #3: careful with that axe Medium-aged and mature firms outperform the market when they make a limited frequency of divestments (1-2 per period) Annual total return vs. market (pp) Relationship between divestment frequency and returns for medium-aged and mature firms OLDER FIRMS DIVESTMENTS 0.6% 0.1% 2.9% All Inactive Active Very active Extremely active -3.1% -3.8% Copyright Intralinks 2015 All rights reserved 20

9 What does excellence from M&A activity look like? Definition of Excellent Corporate Portfolio Managers (ECPMs) High level of M&A: at least one new deal in at least 75% of all periods for which listed in the study High performance: above average annual normalised total shareholder return in at least 50% of all periods for which listed in the study 1,469 global ECPMs ~ 6% of all firms 14% 12% 10% 8% 6% 4% 2% 0% -2% Average annual total shareholder return vs. market (pp) Excellent Corporate Portfolio Managers Others Copyright Intralinks 2015 All rights reserved 21

10 M&A strategies of ECPMs - acquisitions ECPMs have bolder M&A strategies, with greater execution risk - higher proportion of cross-border and hostile acquisitions ECPMs buy more from financial sponsors (private equity) and public companies ECPMs are more likely to use all-cash consideration for acquisitions ECPMs achieve faster deal completion for acquisitions Average % of deal value 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Statistically significant deal attributes of ECPMs vs. others - acquisitions 38% 38% 30% 28% 7% 5% All-cash Cross-border Financial sponsor seller 0.8% 0.2% Hostile Excellent Corporate Portfolio Managers 48% 40% 33% 34% Seller public Slow time to complete Others Copyright Intralinks 2015 All rights reserved 22

11 M&A strategies of ECPMs - divestments ECPMs exploit a wider range of strategic options when selling assets Sell more to foreign buyers - higher proportion of cross-border deals Sell more to financial sponsors (private equity) and public company buyers ECPMs achieve faster deal completion for divestments Average % of deal value 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Statistically significant deal attributes of ECPMs vs. others - divestments 50% 47% 35% 26% 12% 9% Buyer public Cross-border Financial sponsor seller 33% 39% Slow time to complete Excellent Corporate Portfolio Managers Others Copyright Intralinks 2015 All rights reserved 23

12 M&A strategies of ECPMs acquisition size ECPMs undertake smaller acquisitions, relative to their own size, than other firms, avoiding large, transformational acquisitions that could pose significant execution or integration risk Average acquisition value/sales of acquirer Average acquisition value/sales of acquirer* Excellent Corporate Portfolio Managers Others *Last 12 months sales prior to year of acquisition Copyright Intralinks 2015 All rights reserved 24

13 M&A strategies of ECPMs acquisitions vs. divestments and market timing ECPMs make significantly more acquisitions by value than divestments compared to other firms ECPMs make significant adjustments to their M&A strategies to take account of market conditions and take advantage of valuation opportunities Acquisition value/divestment value Acquisition deal value to divestment deal value ratio of ECPMs vs. other firms Average = 3.4 Average = 1.0 Excellent Corporate Portfolio Managers Others Copyright Intralinks 2015 All rights reserved 25

15 Swiss ECPMs Company name ABB Aryzta Bucher Industries Burkhalter Galenica Givaudan Nestle Novartis Roche Holding SGS Sika Tamedia Walter Meier Company sector Industrials Consumer Goods Industrials Industrials Consumer Services Basic Materials Consumer Goods Healthcare Healthcare Industrials Industrials Consumer Services Industrials Full global list of ECPMS at: Copyright Intralinks 2015 All rights reserved 27

17 Conclusions If your firm doesn t have an M&A strategy, you need to get one : M&A inactivity = underperformance Buy frequently while you are young: only highly acquisitive young firms outperform As you get older, keep buying: performance of older firms is positively correlated with acquisition frequency As you get older, divest occasionally: limited divestment frequency = outperformance Excellence requires some risk: ECPMs have bolder M&A strategies but avoid large transformational acquisitions Excellence requires changes in strategy to take advantage of valuation opportunities and respond to market conditions Copyright Intralinks 2015 All rights reserved 29

20 Key finding: does performance drive M&A activity or activity drive performance? The study finds significant causality links between firms performance and M&A frequency (acquisitions and divestments) Poorer past performance Better past performance Being inactive or Being active Being very or extremely active Future underperformance Future underperformance Future outperformance Copyright Intralinks 2015 All rights reserved 32

21 Key finding: does performance drive M&A activity or activity drive performance? which may help to explain the cyclicality of M&A Poorer performance M&A overactivity No M&A activity Better performance Poorer performance Increased M&A activity Copyright Intralinks 2015 All rights reserved 33

Masters of the Deal Part 2: does M&A create shareholder value? The strategies of Excellent Corporate Portfolio Managers

Masters of the Deal Part 2: does M&A create shareholder value? The strategies of Excellent Corporate Portfolio Managers A research study by the M&A Research Centre at Cass Business School and Intralinks