Merger activity increased during the second half of the year, in spite of high deal premiums. Here’s a look at how the markets reacted.
After a slow start last year, M&A activity in 2012 picked up during the second half of 2012, bringing the total value of activity to a level just 1 percent below 2011. The continuing economic uncertainty in Europe reduced European deal volume further, although activity there showed a remarkable rebound in the fourth quarter. Deal volume in Asia declined as well. In the Americas, however, deal volume notched up, leading the global M&A market with 48 percent of volume.
Deal premiums remained high. Although global stock-market valuations recovered materially during the year, with the S&P 500 index increasing by more than 10 percent, the average premium paid by acquirers hovered around historic levels—comparable even to the average paid during the M&A boom driven by the high-tech industry at the turn of the century (Exhibit 1).
There is, however, a distinct difference in investor perception about current M&A deal activity compared with that of the high-tech boom. At that time, investors were skeptical about many of the deals announced, and they heavily penalized acquirers for the lack of credible value-creation potential from those deals. Our deal-value-added (DVA) index suggests that investors were more sanguine about deals announced in 2012, in spite of the lingering global economic malaise.
The DVA that investors currently perceive at deal announcement continues to be high (Exhibit 2), and the share of acquirers that face a negative investor reaction to the deal announcement continues to be at a historically low level (Exhibit 3). To explore the deal value added and percentage of overpayers for deals by industry, geography, and source of funding, see our interactive exhibit “How markets view M&A: A McKinsey interpretive tool.” These results imply that even in this uncertain period, investors recognize M&A as a pivotal element of corporate strategy. Whether companies can meet or beat the expectations suggested by announcement effects, of course, depends on whether they can excel at integration and value capture. Executives who want to do so will need to build and sustain a strong corporate M&A capability.