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Cash Is King, Survey ConfirmsBy STEPHEN GROCER
September 27, 2007; Page C2 Contemplating a merger? If you want to get the best returns for shareholders, it's best to do all-cash deals directly in your industry, says new research from accounting firm KPMG. The all-stock transactions? Stay away. The study, which examined 510 deals announced between 2000 and 2004 and was done in consultation with University of Chicago Graduate School of Business Prof. Steven Kaplan, shows that, overall, mergers do generate value. Based on a normalized return -- defined as the stock-price returns of companies relative to others in their industry -- corporate acquirers outperformed their peers by 3.7% after 12 months and by 10.8% after 24 months. The study also shed light on what makes some deals more successful than others. Most notably, it reveals that when it comes to deals, cash is truly king. Acquirers that used cash to finance deals saw a normalized stock return of 27.5% after 24 months, compared with a 3.6% return after two years for firms that financed the purchase with stock. Deal-making companies with the lowest average price-to-earnings ratio compared with industry peers generated normalized stock returns of 42.2% after two years, compared to a 0.8% return for firms with the highest P/E ratio. Part of the explanation for the disparity is that corporations with valuations higher than their peers may view their stock as ample currency, best deployed before its value falls, said Daniel Tiemann, national lead partner for the Transaction Services practice at KPMG. Firms with high price-to-earnings ratios may also have a more difficult time increasing their share price and may be willing to engage in riskier deals, he said. "When a company uses stock, it can be less selective and less careful because you don't have to pay money back," Mr. Kaplan said. "And I think companies are more likely to use stock when their shares are overvalued or correctly valued." Transactions by smaller acquirers, with market capitalizations of below $7 billion, also fared better than their larger peers. Smaller acquirers saw a normalized stock return of 15.8% two years after the deal was announced, compared with a negative return of 7.7% for large acquirers, according to the study. "They are doing smaller deals, which equates to easier to integrate," Mr. Tiemann said. Write to Stephen Grocer at stephen.grocer@wsj.com
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