A study finds that well-managed firms that expand abroad through acquisitions trade at higher valuations but deliver lower share price returns — and that US acquirers shop most often in Britain.
The author picked up a paper about management quality and international expansion, and got tripped up by something else entirely.
Good management is not a good stock
The paper says firms run by better managers are more likely to go international, and the market pays up for them with higher multiples. Paying a high price means the actual return to shareholders is lower.
On average, acquisitions destroy value
The data sorts US companies into four groups: those that stay domestic, and those that go multinational without buying anyone, both deliver higher returns. Make acquisitions — at home or abroad — and average returns are worse. Share price reactions to deal announcements confirm it.
Purely domestic firms carry more risk: less diversified revenue, on average weaker management. The market compensates that risk with higher returns over the cycle. A small comfort for investors in UK domestic companies, which have done badly for years.
One more finding: when US companies go shopping abroad, British businesses are their prime target. No wonder the number of listed UK companies keeps shrinking.
Why it matters
When a deal is announced, the pop in the share price is often the market being polite rather than the market making a judgement. Once a capable management team has been priced at a premium, the new shareholder is left with thinner returns — so ask what the buyer paid for the privilege.
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