Sep 15, 2007

Small is better

As far as acquisitions go, according to a study by BCG (via Sify)

"The Brave New World of M&A," a recent study by Boston Consulting Group, says, "Deals that are above $1 billion destroy nearly twice as much value as transactions under $1 billion, reflecting the difficulties of integrating large targets."

BCG has studied more than 4,000 M&A deals and says that the number of mega deals in excess of $1 billion is rapidly increasing.

BCG's M&A findings come at a time when some domestic companies have just gulped down foreign companies that are larger than their own size for deals worth several billions of dollars.

The companies that went for multi-billion-dollar deals in the recent past include Tata Steel which acquired Corus Group and Hindalco which bought out Novelis.

However, BCG says it has not looked at these companies and cannot comment on any particular deal. BCG, however, has mapped most of the value-creating deals done so far and has studied 20 Indian companies involved in the M&A game.

"The complexity of the integration gets more complex," says Harshavardhan, partner and director at BCG. "The returns are less for bigger acquisitions," he adds.

I'm no expert on M&A but I suspect mergers are carried out for different purposes. One is the nature of the Tata-Corus deal. The focus of the acquiring entity is to gain scale and markets. The merger that might be better is the one that is carried out to gain capabilities like technology or expertise. The third kind is to acquire iconic brands, and that should be great way to build value too.