Assessing the profitability of growth by acquisition : A premium recapture approach

Abstract This paper makes a case that because of the large premiums paid over the last 20 years by companies undertaking growth by acquisition, this growth probably has been unprofitable. The case has three parts. The first develops a model designed to show for any premium paid for any acquiree the performance improvement required to recapture this premium and create value for the acquiring company. The second part reports the distribution of premiums paid for a large sample of acquirees and uses this model to determine the specific performance improvements necessary to bring about value creation for the new parents of the acquirees. The third part uses historical rate of return data to show that for typical acquirees these improvements call for levels of performance that are difficult to attain and sustain in U.S. industrial markets.