I recently read a blog post titled “Why Do Most Acquisitions by Microcaps Destroy Shareholder Value?“. The author points out that “50-90% of all mergers and acquisitions fail to meet financial expectations” (a statistic some considered to be skewed by unrealistic expectations, billion dollar M&A blunders, and a lack of data on lower market M&A).While it’s very true that many M&A transactions fall short, I disagree with the author’s implication that most microcap acquisitions directly destroy shareholder value.
I would argue that M&A actually increases a microcap’s chance of success. In fact, the author writes “Even though M&A is rarely successful, the irony is that some of the biggest microcap success stories had disciplined acquisition strategies“.
A few examples of successful microcap acquirers include; 1. Middleby Corporation, 2. MTY Food Group, 3. WPP plc, and 4. Cisco Systems. While the list goes on, and I don’t know the exact statistic, I would guess that over 50% of public companies that grew from a valuation of less than $50M to over $1bn grew through M&A.
Those familiar with microcaps, or small businesses/startups in general, know success is extremely rare. While M&A failure is pegged at 50-90%, we can’t forget that the rate of failure for startups is very high and it’s even higher for microcaps!
There is no absolute formula for value creation (or destruction). Saying most acquisitions by microcaps destroy shareholder value is akin to saying most microcaps in a specific industry or with management teams of a certain pedigree destroy shareholder value.
So what reason does the author give for his statement that “Most Acquisitions by Microcaps Destroy Shareholder Value”? Well, he lists 5; 1. Quality, 2. Equity Dilution, 3. Acquisitive Management Teams Using Equity, 4. Large “Transformational” Acquisitions Using Equity, and 5. Too many Too Fast Using Equity.
In short, the author is saying that most acquisitions made by microcaps fail because most microcap management teams are unqualified and lack the discipline required to execute an M&A strategy (or any strategy). And on that point, I couldn’t agree more!
What do you think? Is “Most Acquisitions by Microcaps Destroy Shareholder Value” a fair statement? Are there better ways to grow a microcap than M&A?
Keep an eye out for my next post on this topic where I will discuss ways to overcome the 5 reasons most acquisitions by microcaps destroy shareholder value.
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisitions. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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