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Deals that create value

The market is sceptical about M&A but, as McKinsey explains, it is a lot more receptive to some kinds of deals than to others. Inquire before you acquire.

At least half of all the big mergers, acquisitions, and alliances that make headlines fail to create significant shareholder value. This doesn't mean that such deals should be avoided, just that executives should understand the ingredients of successful ones more fully.

A study of 231 deals in three sectors - global telecommunications, global petroleum, and European banking - showed that 'expansionist' deals, aimed at extending the combined companies' reach or to open new distribution channels, create the greatest stock market value. By contrast, deals considered 'transformative,' aimed at refocusing or diversifying a business, actually destroyed value. The study also showed that, all else being equal, the market favors acquisitions over mergers and mergers over alliances

It is possible to create value with many kinds of transactions, and to destroy value even in deals normally favoured by equity markets. To improve the chances of success, managers must first understand the rationale for a deal and then manage market expectations accordingly.

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Extracted from The McKinsey Quarterly, 2001 Number 1

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