'M&A creating more value with less proportion of over payments'

M&A is the toast of the season for the corporate world and that too not without any reason "" a new McKinsey study shows that the current boom in the mergers and acquisitions market is creating more value with less proportion of over payments.

No wonder, at least three of the top business houses in India "" Tatas, Anil Ambani and Mukesh Ambani "" are currently vying for the tag of biggest ever M&A deal related to the corporate India, while there are the likes of Ranbaxy, Videocon and Hindalco as well reported to be in race for striking some big deals.

The global M&A volume surged to a new record high of four trillion dollars in 2006 surpassing the previous peak of 3.3 trillion dollars in 2000, while India Inc alone announced overseas M&A deals worth over $20 billion in the year.

Still, today the acquirers seem to be creating more value than they did in the past, judging from an analysis of value creation and of the proportion of acquirers that overpay, global consultancy firm McKinsey says in a new study.

In contrast, during the avalanche of M&A in late 1990s, many companies overpaid for acquisitions for and destroyed value for the shareholders of the acquirers, the study shows.According to the McKinsey study, both cash and stock deals are doing better in the current book than during the one that ended in 2000.

The global full year M&A volume had totalled $3.3 billion in 2000.

However, "the earlier boom was known not only for the number of deals completed but also for a lack of discipline and the number of deals that destroyed value for the shareholders of the acquiring companies," McKinsey analysts Richard Dobbs, Marc Goedhart and Hannu Suonio said.

The earlier McKinsey research shows that as many as two-third of all transactions failed to create value for the acquirers, the report added.

An analysis of 1,000 global M&A deals from 1997 to 2006, comparing share prices two days before and two days after the deal, shows that the beginning in 2003 have created proportionately more value for the shareholders.

Also, during the earlier M&A boom ended in 2000, all of the value created went to the target companies' shareholders in more than two-thirds of the deals.

In contrast, this time around shareholders of the acquiring companies appear to be keeping more of that value, as indicated by the lower proportion of acquirers that market believed to be overpaying for the deals.

In the current boom, the proportion of overpaying has averaged 57 per cent, declining annually from 63 per cent in 2003 to 56 per cent in 2006.

In contrast, from 1997 to 2000, the overall average was 65 per cent with the level of overpayment rising from 54 per cent to 1997 to 73 per cent in 2000. The lower number of over payments is also evident from the fact that companies paid an average premium of 30 per cent in 1990s, while companies have paid a premium of about 20 per cent in the current boom.

While acquirers appear to have become more disciplined about creating value, plenty of room remains to improve their M&A performance by focussing on scope to create value and to avoid overpayment, McKinsey said.