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Can firms learn to acquire?

Just because a firm has experience in the M&A sector doesn't mean all its future deals will be successful. This INSEAD report looks at the correlation between past and future performance.

Research into the relationship between past and future returns for equity investment or private equity investment is always topical for investors. What drives the relationship? How heavily should performance statistics and track records be relied on when assessing new opportunities? And how much emphasis should investors place on the experience of the team? All questions that, if answered correctly, could lead to a more successful investment strategy.

Maurizio Zollo, INSEAD assistant professor of strategy and management, and HEC Professor Dima Leschinskii used financial, accounting and questionnaire data to investigate and assess some of the most successful mergers and acquisitions.

The overarching goal of the study was to identify the factors that cause variances in post-acquisition performance. The authors discovered that acquisition experience alone doesn't guarantee a success in the future. True, the firms' methods are more refined the second time around, but experience doesn't always provide the magic numbers for performance. What matters is how much the acquirers invest in trying to extract the key insights from their previous acquisition experiences.

They also backtracked to see if financial markets were effective performance forecasters. Once an acquisition is announced, can the market predict performance outcomes? Can it incorporate public information about the acquiring firm and the deal into the stock price? The authors found that the markets could only learn over the long term. Short-term reactions are just that - reactions.

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Dr Maurizio Zollo can be contacted at +33 1 6 72 44 74 or by e-mail zollo@insead.fr. 
More of his published research is listed on his personal homepage