Corporate Deal Makers Have Reason for Optimism, Based on 2009 Financial Analysis From Towers Watson Deal Monitor

NEW YORK, N.Y., January 18, 2010 — Last year proved to be a reasonably good year for companies completing deals, especially those that closed transactions within their own borders, according to the latest Towers Watson Quarterly Deal Performance Monitor. Commissioned by global professional services company Towers Watson, and based on an analysis by the U.K.’s Cass Business School, the Deal Performance Monitor is the only study of mergers and acquisitions that tracks performance globally.

For calendar year 2009, the acquirers covered in the analysis outperformed the MSCI World Index [the Index] by 3.2% — a modest rise from the 2.7% by which deal makers beat the Index in 2008. Performance was especially strong in two sectors — health care and financial services — both of which beat the Index, by 11.8% and 10.3%, respectively.

Deal performance across the study sample was even stronger in the final quarter of 2009, with acquirers outperforming the Index by 4.0% for the period from six months before deal announcement to the end of the quarter.

Consistent with findings of this study over the last few years, this quarter’s results again confirmed that domestic deals delivered better performance than cross-border deals.

“Our results should not only give potential acquirers greater confidence in considering deals in 2010, but also highlight some of the elements that influence deal success,” said Marco Boschetti, who heads International Consulting at Towers Watson.

“In domestic deals acquirers typically have less complex integration challenges,” Boschetti continued. “This certainly isn’t to say companies should focus only or largely on domestic deals; strategic imperatives require companies to look outside their home countries for deals. But our results do underscore the importance of recognizing the added challenges of running operations in less familiar geographies and integrating across cultures, and the need to handle those deals with a well-timed, well-documented and well-managed process.”

Perhaps because companies preferred to play it safe in light of continued market volatility, the number of domestic deals doubled from the third to fourth quarters of 2009, with these acquirers outperforming the global market by 7.0%.  Cross-border deals, by contrast, underperformed the market by 5.2%. The differing results for domestic versus cross-border deals showed in regional performance as well. In those parts of the world dominated by domestic deals — essentially North America, Asia-Pacific and Latin America — acquirers outperformed the global market. In Europe, by contrast, where the majority of deals were cross-border, deal makers underperformed.

“While credit markets are beginning to open up again,” said Mary Cianni, a leader of Towers Watson’s global M&A practice, “caution remains the watchword for prospective buyers, most of whom seem to be playing it safe right now and focusing on acquiring targets in their home market. This may seem an easier path to deal success, but in our view, the ‘magic’ lies less in the domestic versus cross-border question than in the effectiveness of the integration process.

“Merging entities where differences go beyond company culture to national culture puts far more pressure on the entire deal process, from target evaluation through to full integration, “Cianni continued. “The issues — from identifying and aligning leadership teams to dealing with change to blending work styles and processes — are magnified, often dramatically, and underscore the human dimension. But the answer isn’t to shy away from these situations. Rather, it’s to address them head-on. We know from another recent survey of M&A effectiveness that it’s failure to address the human dimension consistently and comprehensively that can limit the effectiveness of a deal or achievement of desired outcomes.”

M&A: The Critical List

Regardless of economic climate, Towers Watson recommends three critical steps for dealmakers:

- Be diligent about due diligence: over-confidence and a rising share price during the bid phase can lead to companies cutting corners, which can be hugely damaging. 

- Focus on integration execution: grab synergies fast, and ensure you focus on areas of critical value — leadership, communication and talent retention strategies.

- Be prepared: whatever the market conditions, companies should ensure staff are trained to deal with deals. Being ready will ensure speed of execution and quality.

Towers Watson Quarterly Deal Performance Monitor Methodology

• Focuses on deals completed in the last quarter (October 1, 2009 to December 31, 2009)
• Sample data compared on a quarterly and year-to-date basis
• All deals have a value of $100m or more
• All analysis conducted from the perspective of the acquirer
• Deal data sourced from Thomson One Banker
• Final sample of deals — 126

About Towers Watson

Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. The company offers solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Towers Watson has 14,000 associates around the world and is located on the web at towerswatson.com.