The new study focused on 73 Australian domestic deals completed in the year to September 2000 and tracked the share price performance of acquirer companies over the following year.
The change in share price from pre-deal to one year after the transaction was compared against average price movements in the acquirer's industry segment. This provided an objective measure of whether deals had added or destroyed value for shareholders by benchmarking performance against sector average movement.
Companies that performed better than their sector were deemed to have created value (even if the industry sector declined) while those that performed worse than the sector average were deemed to have destroyed value.
Assuming the rationale of an investment is to maximize shareholder wealth, the survey found that only 25% of companies that made an acquisition created value, while 59% suffered an erosion of value and 16% made no difference.
In other words, more than half of the companies that undertook an acquisition found the merged group was actually negative to shareholder wealth, while three in every four deals failed to add any value.
National Partner in Charge of KPMG Transaction Services, Mr David Nott, said the study confirmed suspicions that acquirer companies often failed to deliver the claimed rewards of a merger or acquisition, at least in the first year after the deal.
"There are complex reasons why some transactions are successful and many others are not.
"In some cases, the market is sceptical a year after the event that the deal will sufficiently enhance earnings, although in the longer term it may be successful. In other cases it may be a perception that the price paid was excessive.
"The results of the new Australian survey are consistent with the findings of similar studies by KPMG in the global market, although the Australian survey revealed less wealth creation in M&A activity in Australia compared to overseas".
Mr Nott said the relatively poorer performance of Australian companies compared to companies in the global surveys might be partly explained by the smaller average deal size.
"The UK and US surveys focused on large, cross-border transactions, which are generally subject to intense due diligence. Shortcomings in strategy, operational fit and ultimately the pricing of a deal are more likely to be detected in larger deals, which flows through into higher likelihood of deal success."
He said mergers and acquisitions would continue to be a key growth strategy for Australian business, despite confirmation that most failed to create value in the short term.
"M&A can be a highly successful way to build a business and increase shareholder wealth. This is shown by the top five deals in our survey, which averaged a 90% increase in value. Furthermore, we know that some acquirers consistently get it right."
Mr Nott said the most recent global survey by KPMG identified seven key practices in successful mergers and acquisitions. Companies that adopted these key practices were at least twice as likely to create rather than destroy shareholder value.
"While this analysis was not conducted as part of the Australian survey, it is fair to assume that the application of these transaction management practices should have favourable results in any market, including Australia."
Mr Nott said these processes included the appointment of a senior executive to manage a deal through its entire life cycle and independent evaluation of post-deal implementation plans.
"These practices have become more common in the 18 months since the close off date of the survey period. We now see companies report to the market the expected synergies from a transaction and then provide periodic feedback as to the achievement of those targets.
"This is a very positive trend and, based upon what I am seeing now in the market, I am confident our next survey in two years will show a significant improvement in the proportion of deals that create wealth for shareholders," Mr Nott said.
David Nott, National Partner in Charge, KPMG Transaction Services, (02) 9335 8265.