You don’t have to search too long before finding material alleging that M&A destroy value. NYU Professor Aswath Damodaran goes as far as to say that asking an investment bank to fairly value an acquisition target is like ‘asking a plastic surgeon to tell you your face is perfect’. When the so-called father of modern valuations is so vehemently against the practice, one might wonder why the volume of M&A transactions continues on its upward trajectory.
Context is required here. Firstly, most academic studies on M&A use event studies to measure the success of transactions. That is, when news of the transaction is publicly released, we assume the stock market’s response to be a gauge of the success or otherwise of the deal (success, as always with the stock market, being a translation for ‘future earnings’). There’s at least one major flaw in this, which even academics will admit to: this assumes that the stock market makes the right call all the time.
Secondly, to give some context on Damodaran’s remark: he’s not arguing against the logic of M&A transactions, as much as it may appear to be the case. His argument is based around the problem inherent in deals: generally, a part of the brokerage fees are based on transaction size. Even we at Morgan & Westfield, as M&A business brokers and M&A advisor, agree that this has the potential to lead to adverse outcomes. But again, it’s far too simplistic to assume that a process that may lead to bias does and will lead to bias.
The economy at large is full of situations where adverse incentives exist.