Current Cycle of M&A Deals Creates More Value for Shareholders Than Two Prior Periods, Finds London's Cass Business School and Towers Perrin Analysis.

STAMFORD, Conn. -- First Research to Show That More Companies Are Better Able to Realize Financial Success From M&A Deals

In stark contrast to the past 20 years, the current wave of M&A deals is now generally financially successful and creating more value for shareholders, according to research conducted by London's Cass Business School, in conjunction with Towers Perrin. The findings, announced today, show that, in 2004, companies involved in M&A deals worth more than US$400 million (but excluding the largest mega deals), outperformed the market by 7%. By contrast, share performance of companies involved in similar deals in the M&A cycles of 1998 and 1988 underperformed the market by approximately 3% and 6%, respectively.

The Cass - Towers Perrin study examined a total of 218 global deals with an inflation-adjusted value of between US$400 million and US$1.5 billion, which were concluded in 1988, 1998 or 2004. The study analyzed company performance for a one-year period -- six months before and after the deal closing -- to determine the relative degree of financial success.

"A paradox exists in the world of mergers and acquisitions," said Marco Boschetti, principal and leader of Towers Perrin's M&A consulting practice. "Other studies that have looked at M&A deals in the past 20 years have found that deals in earlier M&A cycles destroyed, rather than created, shareholder value. Yet to grow to be an organization operating on a global scale, it is almost impossible to do so quickly enough through organic growth alone. Mergers and acquisitions have in many ways become necessary. Interestingly, evidence is now mounting that the deals conducted in the current merger wave may be different. Across a broad range of industries throughout the world, lessons learned are being applied."

Early indications are appearing now that point toward deals being successful during this latest cycle. On every single financial and share performance factor analyzed by Cass Business School, deal success was better in this merger wave (those that have closed since 2003) than in the two major waves taking place in the late 1980s and 1990s.

"We believe this success is a direct consequence of companies' improved management of the M&A process, from target selection and pricing, to due diligence to implementation," said Boschetti. "In the future, this learning curve will certainly continue. So, while gaining competitive advantage through M&As is now a legitimate business strategy for growth, long-term success will depend on increasingly sophisticated M&A capability."

According to Towers Perrin, which assists over 300 multinational companies a year with mergers or acquisitions, the improved financial success of recent M&As is driven by improvements in three areas of corporate behavior:

1. Better deal governance: Today, company senior management is much more closely aligned with shareholders in terms of the aims and objectives of corporate transactions. Managers are now more inclined to approach a deal rationally with a focus on the financial objectives.

2. Better deal selection: M&A deals are now subject to more rigorous due diligence processes. For many companies, due diligence now includes assessment and quantification of the financial impact of factors, such as corporate benefit programs like pensions and their financial liabilities, which were not considered in earlier deals.

3. Better focus on integration: Corporate behavior and strategies concerning post-deal implementation also led to stronger financial performance of M&A transactions in 2004. In particular, companies tended to focus on the implementation phase as a time to identify and deliver on the merged companies' financial synergies. There is growing acknowledgment that retention and engagement of employees at all levels of the organization in post-deal integration has a direct impact on the operational success of M&As, which in turn is a key driver of M&A financial success.

"If M&As are now a successful business strategy for achieving above-average share performance, then ignoring M&A opportunities might place companies at risk of underperformance," concludes Boschetti. "But if M&A activity is becoming a competitive necessity, it is still a risky one, and companies engaging in this growth strategy would do well to ensure they understand the importance of deal management and governance, deal selection and integration. If they do not, they risk becoming one of the few cautionary tales of this wave or the next."

About This Study

The purpose of the joint research was to identify whether deals in the current merger wave (post-2002) are successful in financial terms and to find out how they compare to deals in two recent merger waves. As it is unclear whether 2005 will represent the peak of the current merger wave, Cass - Towers Perrin chose nonpeak years preceding the peak years in the earlier waves to provide a comparison among the three merger waves. Years chosen for review were 2004, 1998 and 1988. All data were obtained from public databases and so do not depend on any company's participation.

The period of analysis -- performance for a one-year period surrounding the closing of a deal -- was chosen to allow both Cass and Towers Perrin to analyze deals conducted well into this current merger wave, but still below the existing peak year of 2005. The data include one year (six months before and after the deal took place) of a company's performance, liquidity, leverage and solvency ratios on which the success of the deal will be judged. The data comprise 218 companies overall.

For information and perspectives on the research, send a request via e-mail to [e-mail].

About Cass Business School

Cass Business School is one of Europe's leading providers of business and management education, consultancy and research. The disciplines it covers range from finance and insurance to leadership, corporate governance and risk. Cass has the largest finance faculty and the largest actuarial science and statistics faculty in Europe. Its finance research is ranked second in Europe and fourth in the world outside the U.S. by Financial Management Magazine and its insurance and risk research is ranked second in the world by the Journal of Risk and Insurance. The Cass Executive MBA is ranked 10th in the world by Financial Times.

About Towers Perrin

Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. Through its HR Services business, Towers Perrin provides global human resource consulting that helps organizations effectively manage their investment in people. Areas of focus include employee benefits, compensation, communication, change management, employee research and the delivery of HR services. The firm's other businesses are Reinsurance, which provides reinsurance intermediary services, and Tillinghast, which provides management and actuarial consulting to the financial services industry. Together, these businesses have offices and business partner locations in 25 countries. More information about HR Services is available at www.towersperrin.com/hrservices.