There were more than 4,100 completed mergers and acquisitions (M&A) between 2005 and 2007, according to recent analysis from PricewaterhouseCoopers (PwC), announced last week in a report entitled Producing Value.

And the rate of M&A activity is increasing.

There were 1,500+ transactions last year, with a record $97 billion changing hands, according to PwC's calculations. In 2005, there were fewer than 1,200 M&A transactions, with a total traded worth of $45.7 billion. Year on year, the aggregate worth of the deals whose values were disclosed has risen sharply.

Says an announcement of the report:

A surge in the number of transactions worth $5 billion or more accounted for much of this dramatic increase, and brought the total for all three years to a hefty $198.8 billion. Western Europe accounted for nearly 40 percent of the deals. Germany took pole position, with 385 deals collectively worth more than those that occurred in France and the UK combined. But three very large U.S. transactions saw North America shoot to the top in terms of the total value that was traded.

Sectors that support industries like electricity, gas, oil exploration, mining and construction, have been experiencing strong deal activity, of course, while there has also been "robust activity" in heating, ventilation and air conditioning and industrial automation.

The Producing Value report anticipates more deals in emerging markets like Eastern Europe, India and China: "This will include both deals involving Western players keen to expand their footprint and [capitalize] on the opportunities for low-cost manufacturing as well as deals involving companies from emerging countries as they become global players.

"Companies in emerging regions are seeking access to cutting edge technology, skilled engineers and expertise in research and development," the report's announcement continues.

But does M&A pay?

In the latest issue of The New Yorker, financial columnist James Surowiecki reflects on M&A: "[C]orporate marriages only rarely end in bliss — many studies have found that most mergers and acquisitions do little for the acquiring company's bottom line."

In his editorial, entitled All Together Now?, Surowiecki points to two studies, one from KPMG that analyzed a sample of 700 mergers and found that only 17 percent created "real value." He also cites a rather well-known McKinsey study from the 1990s, which found that "less than a quarter [of mergers] generated excess returns on investment."

On the other hand, Surowiecki does acknowledge: "There are, of course, situations in which acquisitions do make sense."

"The merger of J. P. Morgan and Bank One, for instance, led to more than three billion dollars in annual cost savings," he writes parenthetically.

And what about all the small industrial firms?

According to the PwC report, 39 large deals, with a collective value of $106.1 billion, represent more than half the sum traded in the industrial manufacturing sector between 2005 and 2007. However, many of the smaller players are also consolidating. More than 1,400 deals "had values of less than US$100 million and nearly 2,500 had undisclosed values, most of which would have been quite small scale transactions."

Considering that many sectors remain extremely fragmented, PwC says there is "excellent potential for securing cost synergies, particularly among small and middle-market targets."

"Acquisitions of smaller, younger private companies are usually wiser than acquisitions of publicly traded firms," Surowiecki writes. "They're more likely to give you access to new technologies or products, and you're more likely to be able to make the deal at a good price."

Companies in emerging markets and regions are focused on improving technology and enhancing energy efficiency to meet evolving business requirements — whether determined by new regulations and legislation or market share and competitiveness.

"Then again," Surowiecki continues, "much of what mergers are supposed to accomplish can be achieved through partnerships and alliances." He points to how, in recent years, I.B.M. has marketed the products of its competitors Sun Microsystems and Novell, enabling it to expand its offerings and its potential customer base.

M&A is hard work. It requires discipline, planning and a focus on integration and strategic issues. As one IMT reader once commented on the issue: "Looks like the dilemma is never-ending."

Earlier: Mergers & Acquisitions: Is Bigger Better?

Resources

Producing Value: Global Industrial Manufacturing Mergers and Acquisitions Analysis 2005-2007
by Graeme Billings
PricewaterhouseCoopers, May 30, 2008

All Together Now?
by James Surowiecki
The New Yorker, June 9, 2008

Industrial Manufacturing Sector Produces Further Growth
PricewaterhouseCoopers, May 30, 2008