M&A Activity Poised for Growth Under Trump, but Most Deals Likely to Fail

Merger and acquisition (M&A) activity is expected to surge following Donald Trump’s election victory, driven by a favorable regulatory environment and strong market conditions. However, the majority of these deals—70%-75%—are likely to fail, according to a new book, The M&A Failure Trap.

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Key Findings on M&A Failures

1. Historical Failure Rates:

   • Analysis of 40,000 acquisitions over 40 years found that 70%-75% of M&A deals do not meet expectations.
   • Only 20% of acquisitions made during hot markets (S&P 500 trailing 24-month return > 50%) succeeded, compared to 41% during weaker markets.

2. Why M&A Fails:

   • Overpriced Deals: CEOs often overpay for target companies.
   • Strategic Misfits: Acquired businesses fail to integrate effectively into the parent company.
   • Overconfidence: Overconfident CEOs pursuing aggressive acquisitions see a 50% lower success rate compared to their more cautious counterparts.

3. “Winning by Losing”:

   • Companies losing bidding wars for acquisitions tend to outperform winners by 25% on a risk-adjusted basis over the three years following the deal.

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Drivers of the Upcoming M&A Wave

1. Relaxed Regulations:
   • Trump’s presidency is expected to bring lower antitrust scrutiny and a more permissive environment for M&A activity.
2. Strong Market Conditions:
   • The S&P 500’s 55% trailing 24-month return and expectations of lower interest rates create ideal conditions for acquisitions.
3. Corporate Pressure:
   • CEOs face demands to “do something big,” often leading to hasty, ill-conceived deals.

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Perverse Incentives Behind M&A

1. CEO Tenure Insurance:
   • Struggling CEOs may pursue acquisitions to buy time and secure their positions.
2. Newly-Appointed CEOs:
   • Acquisitions in a CEO’s first two years have a success rate half that of deals made later in their tenure.
3. Investment Banker Influence:
   • Commission-hungry advisors push CEOs toward deals, regardless of their strategic fit.

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Lessons for Investors

1. Be Skeptical:

   • Avoid getting caught up in the hype of M&A waves.
   • Question management’s motives when voting on acquisitions.

2. Focus on Resilient Companies:

   • Companies that resist the rush to acquire during hot markets tend to deliver better long-term returns.

3. Historical Insight:

   • Past evidence suggests that most acquisitions destroy value, making it wise to approach the upcoming M&A boom with caution.

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Conclusion

The Trump administration’s expected pro-business stance will likely fuel a surge in M&A activity, but investors should approach with skepticism. With failure rates historically high, the allure of mergers often masks their potential to destroy shareholder value. As history shows, the best strategy may be to invest in companies that resist the rush to acquire.

Mark Hulbert is a contributor to MarketWatch and monitors investment newsletter performance through his Hulbert Ratings service.