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Managing the market’s reaction to M&A deals

Posted May 31, 2016

Source: McKinsey

Announcement effects are a good instant measure of market sentiment but a poor indicator of longer-term value creation.

Nothing supports the integration of a major acquisition like the sense that the market has blessed it. Managers watch their company’s share price closely in the days following the public announcement of a deal, if only to reassure themselves that they didn’t overpay and that their efforts to value synergies, plan communications, and navigate legislative hurdles didn’t overlook anything.

This use of announcement effects as a gauge of M&A’s success persists among both practitioners and academics. Yet the market’s immediate response to a deal is an imperfect measure of its long-term value. In fact, we’ve found no correlation between the announcement effects of a deal and its excess total return to shareholders (TRS) two or more years later (exhibit). Among M&A deals large enough to elicit investor reactions that show up in share prices,1 one-third of the companies that see a positive reaction to the announcement go on to have a negative TRS after two years. Even more striking, more than half of the companies that initially see a negative reaction go on to earn a positive TRS over the longer term.

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