North America Leads Deal Performance in Second Quarter 2010

Towers Watson Quarterly Deal Performance Monitor Highlights Potential New Trend in Improving Performance of Cross-Border Deals

NEW YORK, July 19, 2010 - Companies that completed acquisitions or mergers during the second quarter of 2010 continued to outperform the market, beating the MSCI World Index (the Index) by 3.1 percentage points, according to the latest Towers Watson Quarterly Deal Performance Monitor, the only M&A study to track the performance of global deals. The most recent results of this ongoing M&A study, commissioned by global professional services company Towers Watson (NYSE, NASDAQ:TW) and based on an analysis by the U.K.’s Cass Business School, confirm that deals have consistently created value for shareholders, even in the most challenging periods of the recession. This was particularly true for North American deal makers this quarter, who led the pack in performance against the Index. North America also accounted for almost half of the quarter’s cross-border deals, which, for the first time, surpassed domestic deals in delivering value. 

North America Leads World in Regional Deal Activity and Performance

Deal making in North America surged in the second quarter, both domestically and across borders, with the 94 deals completed representing almost a 50% jump from the prior quarter. This increased appetite for deals, including those outside the region, put North American deal makers ahead of acquirers in other regions in terms of performance, surpassing the global market by 3.8 percentage points. In Asia Pacific, acquirers outperformed the global market by 3 percentage points this quarter, with European acquirers coming in just 0.2 percentage points below the global market index.

A Sea Change in Cross-Border Results?

In one of the more interesting findings of this quarter’s analysis, cross-border deals outperformed domestic deals for the first time since this study was launched. Traditionally, companies have viewed cross-border deals as more challenging and, in fact, they have created less value than domestic deals. But this quarter’s results overturned this trend, mostly due to the level of activity in North America, where almost half of all cross-border deals completed in this quarter took place. As a result, foreign deals outperformed the global market by 5.6 percentage points, while domestic deals outperformed the market by only 2.9 percentage points.

“While our Deal Monitor continues to indicate that deal making creates value, this quarter has thrown up a potentially interesting new trend in global M&A,” said Marco Boschetti, who heads International Consulting at Towers Watson. “Historically, cross-border deals are more complex, take longer to complete and are more difficult in terms of creating value than domestic deals. This is supported by all our data to date. Yet the surprise this quarter is the complete reversal in fortunes. It’s too early to say if this is a blip or a trend, so we will continue to monitor this new indicator in the following quarters.”

Added Mary Cianni, head of Towers Watson’s global M&A practice, “Our data certainly support the notion that North American companies have greater interest in deal making – at home and abroad. The favorable dollar helps cross-border appetite, but North American acquirers not only seem better at creating value in deals, but also at realizing value in cross-border deals – an area traditionally more difficult for all acquirers.”

Deal Speed - and Size - Count in Success

The Quarterly Deal Performance Monitor also found that companies completed deals far more quickly in this quarter than during the same period last year. Global acquirers’ deals in the second quarter of 2010 took an average of 66 days to complete, compared with 100 days in the second quarter of 2009 – a 34% reduction in time involved. This quarter’s data indicate an interesting relationship between speed and results, with the “quick” acquirers outperforming the Index by 5.8 percentage points, compared to the “slow” acquirers, which underperformed by 0.2 percentage points.

Deal size proved to be another key factor in results, with medium-sized deals more likely to create value than larger deals. In some respects, large deals carry the same challenges as cross-border deals: They are more complex, harder to manage and tend to take longer to complete. Indeed, this quarter’s analysis confirms the timing issue, with the 25 largest deals taking an average of 198 days to complete, compared to just 66 days for all deals. The analysis underscores the performance issue as well: The average deal among the largest 25 deals in the second quarter of 2010 underperformed the market by 10.8 percentage points.

“Companies are now better at doing the groundwork when assessing a target and are able to execute a deal much more rapidly when the deal is right,” said Steve Allan, the leader of Towers Watson’s EMEA M&A practice. “And this quarter’s results indicate that speed and size may be linked: Large deals tend to be slower; slower deals tend to create less value. Speed seems to be a plus when it comes to extracting value. Our analysis has continued to show over time that medium deals tend to generate better value than the biggest deals. With medium-sized deals, a ‘good’ deal may be apparent fairly quickly. However, if a deal is taking longer to close than is reasonable, that may be symptomatic of deeper problems.”

M&A: The Critical List for Deal Makers

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

• Be diligent about due diligence. Careful and informed analysis during the bid phase is essential to avoid making potentially significant mistakes. Successful buyers understand how to manage this process with appropriate speed in an environment of incomplete information. They also understand the nuances of conducting due diligence across borders when access to information may be more limited.
• Engage your internal deal partners early. Getting a head start on integration planning adds value and having “M&A ready” leaders and managers helps to jump-start the integration process.
• Focus on integration execution: Grab synergies fast, and maintain momentum in key areas of value, such as leadership, communication and talent retention, all of which continue to be key differentiators between successful and less-than-successful deals.

Towers Watson Quarterly Deal Performance Monitor Methodology

• Focuses on deals completed in the second quarter of 2010 (April 1 through June 30)
• Sample data compared on a quarterly basis
• All deals have a value of $100 million or more
• All analysis conducted from the perspective of the acquirer
• Share price performance measured as percentage change in share price from six months prior to the announcement date to the end of the quarter (second quarter of 2010)
• All deals where the acquirer owned less than 50% of the shares of the target after the acquisition were removed, hence no minority purchases have been considered – all deals where the acquirer held more than 50% of target shares prior to the acquisition have been removed, hence no remaining purchases have been considered
• Deal data sourced from Thomson One Banker
• Total number of deals: 162