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M&A: The Markets Love a Buyer

As Laurie Brlas, chief financial officer of Cliffs Natural Resources (CLF), prepared to announce a deal to buy a rival mining company this year, she was confident investors would eventually see the wisdom of the plan. She didn't expect them to see it so fast. After Cliffs agreed to purchase Consolidated Thompson Iron Mines for about $5 billion, its shares gained 4.1 percent. "There was a very good chance the immediate next day might have had a different outcome," Brlas says.

The increase challenges the notion on Wall Street that acquirers are punished for spending money. The typical takeover announcement gave the buyer a quick share gain of more than 1.1 percentage points above its benchmark stock index both this year and last, according to a Bloomberg analysis of 3,804 global transactions since 2000. The latest example: Apparel maker VF saw shares climb 10 percent on June 13 after it agreed to acquire Timberland for $1.8 billion.

Shareholders cheer because companies are pursuing growth after exhausting options to cut costs and boost sales internally. "Organic growth continues to be a challenge for many companies," says Christopher Ventresca, co-head of North America mergers and acquisitions at JPMorgan Chase (JPM). "Ten years ago you could preach Six Sigma or lean manufacturing or some other internal effort."

Bloomberg analyzed takeovers worth at least $200 million in which the buyer was a public company and no more than 10 times as large as the target. For each transaction it calculated the stock market return from the day before the announcement to the day after, minus the return in a benchmark stock index, to eliminate the impact of broad market movements. Last year the median share price gain for companies that announced an acquisition was 1.11 percent, the most for any full year in the study. So far this year, the figure is 1.18 percent. The worst performance was in 2000, when the median decline was 1.77 percent.

Even deals that don't work out can boost a stock. J. Michael Pearson, CEO of Valeant Pharmaceuticals International, offered $5.7 billion in cash for another drug company, Cephalon (CEPH). News of the offer in March sent Valeant's shares up 13 percent. While Cephalon eventually found another buyer, Valeant's stock has held onto its gains, which Pearson ascribed partly to the market's realization that Valeant could strike another big deal. "There are a lot of other Cephalon—like companies out there," he says. Cephalon ended up agreeing to a deal with Teva Pharmaceutical Industries (TEVA) on May 2. Teva's stock rose 3.4 percent on the news.

The bottom line: Stocks of companies announcing acquisitions this year have posted a median gain of 1.18 percentage points above their benchmarks.

McCracken is a reporter for Bloomberg News in New York.
Mider is a reporter for Bloomberg News in New York.

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