Inflated valuations in stock markets have caused companies on shopping sprees to underperform their index for the first time in 10 years, according to a study to be published today.
The share prices of acquirers worldwide have underperformed the MSCI world equity index by 0.9 percentage points in the last 12 months, according to the study by the Cass Business School and investment and insurance firm Willis Towers Watson.
Dealmakers in the final quarter of the year have particularly struggled to match the index, underperforming by 5.6 percentage points. That was the lowest quarterly reading since the financial crisis in 2008.
Firms which make acquisitions have tended to perform better than the benchmark, suggesting merger and acquisition (M&A) activity is usually beneficial.
The figures show a three-year rolling average outperformance of five percentage points by firms involved in deals above $100m in value. The longer-run average outperformance since 2008, which includes the aftermath of the financial crisis, stands at 3.6 percentage points.
However, in the final quarter of 2017 88 out of the 198 large deals worldwide tracked by the research failed to add value to the share price of the company.
Jana Mercereau, head of UK corporate M&A at Willis Towers Watson, said: “Global conditions for M&A in 2017 have been tough, and delivering a successful deal and realising value is increasingly difficult.
“Inflated price-to-earnings ratios have made deals more expensive, with companies often paying large premiums in a bidding war or as a defensive tactic, and making it increasingly difficult to realise a strong return.”
The tech sector suffered a particularly ignominious fate during the quarter, underperforming the broader market by a massive 23.9 percentage points.
Dealmakers in Asia-Pacific were the worst regional performers, losing out by 29.2 percentage points, an all-time low for the region.