M&A deals built around cash transactions involving companies with below-average price-to-earnings ratios are the most likely to increase shareholder value, according to a new study.
KPMG released the results of a study that the firm conducted with Steven Kaplan, a professor with the University of Chicago's Graduate School of Business. The study looked at 510 corporate deals announced between 2000 and 2004.
KPMG found that the most successful transactions aimed to build financial strength and improve distribution channels. Companies with lower market caps completed the most successful deals, and the most successful acquirers made just one or two other M&A deals in the previous two years, making it easier for them to focus on integrating a particular M&A target.
Cash deals seemed to be the most successful, according to the findings. Based on normalized stock returns, the average cash deal showed a 15.1 percent return after one year and a whopping 27.5 percent after two years. In contrast, deals financed with a combination of cash and stock showed a 3.9 percent return after one year and a 9.8 percent return after two years. All-stock deals fared the worst, with a -2.1 percent return after one year and 3.6 percent return after two years.
