Distressed M&A hurts return on equity

LONDON Mon Jun 15, 2009 8:27am BST

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LONDON (Reuters) - Companies who bought distressed or insolvent rivals over the past quarter-century suffered lower returns on equity and underperformed buyers of healthy firms, a study released on Monday showed.

The research, from London's Cass Business School, highlights the perils facing executives tempted to use the financial crisis to buy struggling rivals at apparently bargain prices.

The ill-fated acquisitions of imperilled banks Merrill Lynch and HBOS by Bank of America (BAC.N) and Lloyds (LLOY.L), are high-profile recent examples, though the study itself excluded the financial services sector.

The study looked at almost 3,000 acquisitions of distressed or insolvent companies from 1984 to 2008.

It found acquirers' return on equity ROE.L deteriorated in the three years after the deal, and the buyers underperformed those who bought healthy firms.

"Even though acquisitions of distressed firms are viewed as value-enhancing by the market -- no doubt driven by low valuations -- the integration process of a distressed target proves challenging for many acquirers," wrote the authors, led by Scott Moeller.

U.S. acquirers of distressed firms enjoyed a short-term, statistically significant boost in their stock after the deal was announced, but UK acquirers enjoyed no such lift.

The study also found mergers and acquisitions (M&A) involving distressed or insolvent firms also completed significantly faster than other deals, putting extra pressure on management teams.

While an anticipated flood of distressed M&A has so far failed to materialise, the survey suggested the next few years may provide more fodder for turnaround specialists.

After previous stock-market busts in 1990 and 2000-2003, acquisitions of distressed and insolvent companies made up a higher-than-usual proportion of overall deals for the next three to four years.

(Editing by Will Waterman)

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