Mergers and acquisitions are big business; in the last two years alone there have been more than 20 transactions in the home building industry. The significant acquisition activity suggests intuitively that these transactions are perceived by executives and investors as an important vehicle to create shareholder value.
“Unfortunately, research does not uniformly support managers’ apparent enthusiasm for the practice, with the impact of acquisitions on acquiring firms’ performance remaining ‘inconclusive’” (King, et al., 2003).
Among many studies, KPMG’s study, Unlocking Shareholder Value: The Keys to Success (1999) indicates acquisitions resulted in no gain or a loss of shareholder value an amazing 83% of the time during the first two years of an acquisition.
The home building industry is in the midst of an acquisition wave. The wave started in 2012, and has picked up momentum. As the wave continues what should acquirers, investors and those acquired be thinking about. We can gain some insight from research by McNamara, Haleblian, and Dykes, “Performance Implications of Participating in an Acquisition Wave: Early Mover Advantages, Band Wagon Effects, and the Moderating Influences of Industry Characteristics and Acquirer Tactics” (Academy of Management Journal, 2008, Vol. 51, No. 1).
The authors assessed acquisition waves from 1984 through 2002 and included nearly 3,200 acquisitions across a wide range of industries, one of which was real estate. Their findings are informative.
First, early movers have a meaningful advantage. Returns decline during an acquisition wave. The authors argue “early movers have the greatest potential to benefit from an acquisition wave and that firms acting later in a wave are likely to experience losses as a result of their acquisitions.” There are three advantages that early movers have over later movers.
First, firms who identify opportunities earlier than competitors may benefit from lower acquisition costs. Simply put, when there are fewer buyers there is less upward pressure on price. Conversely, later movers may have acquisitions bid higher as a result of a more competitive process.
Second, as an acquisition wave moves on, there may be fewer high quality acquisitions available, as the first-choice firms have already been acquired; later movers are picking from the left-overs. The third advantage is that each acquiring firm has certain resources and organizational strengths. When these resources and strengths are combined with another firm’s resources and strengths, synergies should result. By acting early and preempting competitors, early movers can assess a large pool of target firms raising the possibility of gaining synergistic benefits.
Later acquirers are subject to the band-wagon effect; they jump into acquisitions because others are doing it. “Competitive band wagon pressures exist when non-adopters fear missing out on competitive opportunities early adopters appear to be seizing.” Such acquirers risk undertaking a less rigorous evaluation process. “Firms following a bandwagon restrict the scanning they undertake, are less likely to consider contradictory information and are less mindful in their decision evaluation.”
One moderating variable is that serial acquirers reduce the negative impact of acquiring late in acquisition waves. Experienced acquirers have developed a skill-set; they understand the key criteria in making strong acquisitions and they understand the importance of effectively integrating the acquired firm into their own. Experienced acquirers not only do no harm, but they have the ability to capitalize on the identified synergies.
Home building executives and investors alike should be mindful of where we are in an acquisition wave and their true skill-set of effectively analyzing and integrating acquisitions. If you’re not an experience acquirer, this is one time you may want to stay out of the water. And if you are a seller, make sure you have an experience swimmer jumping through the waves on their way out to you.