When It Comes to M&A Deals, First Impressions Are Everything

A new book on mergers and acquisitions by two Deloitte executives argues that a positive “announcement day” reaction to a deal bodes well for future stock performance— and vice versa.

Jeff Weirens and Mark Sirower (LinkedIn photos)

Jeff Weirens and Mark Sirower

(LinkedIn photos)

It appears that the market’s initial opinion of a merger and acquisition deal can go a long way toward ensuring its success.

On Tuesday, the Harvard Business Review Press announced the publication of The Synergy Solution: How Companies Win the Mergers & Acquisitions Game, a book by Deloitte executives Mark Sirower, the firm’s U.S. leader of its M&A strategy and commercial diligence practice, and Jeffery Weirens, the leader of Deloitte’s global financial advisory business.

The Synergy Solution includes tactics that can be used to design an M&A strategy, test an investment thesis, communicate M&A goals to stakeholders, and manage the integration of a newly combined business. The book, which is based on an updated version of a study that Sirower conducted in the ’90s, uses data from Thompson ONE and S&P’s Capital IQ to analyze a 24-year sample (from January 1, 1995 to December 31, 2018) of 1,267 deals representing $5.37 trillion of equity value.

Sirower and Weirens found that initial investor reaction to the prospect of an M&A transaction can be an indication of potential future returns. The authors divided stock market reactions to M&A announcements into two portfolios: one for positive reactions, and the other for negatives. “There are still CEOs who will say you can’t judge the long-term performance on the stock market reaction,” Sirower told Institutional Investor. “If that were the case, then [for] deals that started off positive, that portfolio should trend to zero, [while] the negative reaction portfolio should trend to zero. [But] they don’t.”

In fact, the negative reaction portfolio started with a loss of 7.8 percent, and after a year, had lost 9.1 percent. The same phenomenon occurred on the positive side: That portfolio started with a positive reaction of 7.7 percent, and after a year, saw an even better return of 8.4 percent. Sixty-five percent of the negative deals were still negative a year after the announcement, while 57 percent of the positives remained positive.


“So, while a positive start is no guarantee of future success, especially if companies do not subsequently deliver on promises,” Sirower and Weirens wrote, “a negative start is very tough to reverse, with nearly two-thirds of [those] deals still negative a year later.”

The authors then took their analysis a step further. They coined the term “persistently positive” for deals that began with a positive reaction and then dramatically outperformed deals that began poorly and remained persistently negative. In the first year after the initial announcement, persistently positive deals returned an average of 32.7 percent, while persistently negative deals generated an average return of -26.7 percent. “Market reactions really matter, and that persistence spread is just enormous. And it sustains over time,” Sirower said.

For Sirower and Weirens, the wide value spread is an indication that the long-term success of an M&A transaction is dependent on investor sentiment on “announcement day,” which is when the boards of both companies have approved the transaction, the acquirer’s board has done its due diligence, and the companies have announced their plans to conduct the transaction. The authors also argue that announcement day is vital when it comes to winning over stakeholders.

“Announcement day represents a pivotal moment in the life of a deal, and investor reactions set a powerful tone,” Sirower and Weirens wrote. “Multiple stakeholders and observers will immediately evaluate and interrogate the investor presentation and other communications [about] whether the deal — perhaps the largest capital investment ever made by the acquirer — has any strategic logic, and if it’s worth the price.”

Sirower said the importance of announcement day for the future of the companies involved means that companies need to place more emphasis on their pre-announcement due diligence and their corporate communication strategies. “Preparing for [announcement day] is kind of your last stop in diligence,” Sirower said.

The book also includes chapters on tools that company boards can use during an M&A transaction, advice on the post-close execution of a merger or acquisition, and methods for preparing for the first day of a newly merged entity.