Empirical Results  589 that large acquisitions (relative to the size of the acquirer) tend to dominate the results. The market’s assessment of small acquisitions is hard to discern, yet 95 percent of acquisitions by large companies are of targets that are smaller than 5 percent of the acquirer’s market capitalization. Researchers have shown that acquisitions do create value for the collective shareholders of the acquirer and the acquired company. According to McK- insey research on 1,770 acquisitions from 1999 through 2013, the combined value of the acquirer and target increased by about 5.8 percent on average.1 So we can conclude that acquisitions tend to create value for the economy, through some combination of cost and revenue synergies. For Whom Do Acquisitions Create Value? To see who benefits from acquisitions, we’ll begin by reviewing the studies driven mostly by large acquisitions. While buying and selling shareholders collectively derive value from acquisitions, large acquisitions on average do not create any value for the acquiring company’s shareholders. Empirical stud- ies examining the reaction of capital markets to M&A announcements find that the value-weighted average large deals lower the acquirer’s stock price between 1 and 3 percent.2 Stock returns following the acquisition are no bet- ter. Mark Mitchell and Erik Stafford have found that acquirers underperform EXHIBIT 31.4  Historical M&A Activity: U.S. and European Transactions Inflation-adjusted value of M&A transactions, 2018 $ billion 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Source: Dealogic, Capital IG, Mergerstat, Thomson Reuters. 1 D. Cogman, “Global M&A: Fewer Deals, Better Quality,” McKinsey on Finance, no. 50 (Spring 2014): 23–25. 2 S. B. Moeller, F. P. Schlingemann, and R. M. Stulz, “Do Shareholders of Acquiring Firms Gain from Acquisitions?” (NBER Working Paper W9523, Ohio State University, 2003). 590  Mergers and Acquisitions comparable companies on shareholder returns by 5 percent during the three years following the acquisitions.3 The United Kingdom has new rules requir- ing a shareholder vote on larger acquisitions. Research by Marco Becht, An- drea Polo, and Stefano Rossi showed that in situations where shareholders voted, the stock price reaction of the acquirer was much more likely to be positive than when shareholders didn’t vote. They also showed that in larger transactions in the United States, where shareholders don’t vote, the stock price reactions were also more likely to be negative.4 Another way to look at the question is to estimate the percentage of deals that create any value at all for the acquiring company’s shareholders. McKin- sey research found that one-third created value, one-third did not, and for the final third, the empirical results were inconclusive.5 It comes as no surprise to find conclusive evidence that most or all of the value creation from large acquisitions accrues to the shareholders of the target company, since the target shareholders are receiving, on average, high premiums over their stock’s preannouncement market price—typically about 30 percent. Most of these studies examine the stock market reaction to an acquisition within a few days of its announcement. Many people have criticized using announcement effects to estimate value creation. The evidence on whether an- nouncement effects persist is inconsistent. Sirower and Sahna have shown that the initial market reactions are persistent and indicate future performance for the next year.6 Some of our colleagues, however, examined a different sample of larger transactions over a two-year period and found inconclusive evidence of persistence.7 Although studies of announcement effects give useful results for large samples, the same approach cannot be applied to individual transactions. While the market correctly assesses the results of transactions on average, that statistic does not mean its initial assessment of a single transaction will always be correct. To overcome the large acquisition bias of the studies described, several of our colleagues looked at acquisition programs of companies rather than single acquisitions.8 They examined 1,645 nonbanking companies from 2007 to 2017 and grouped them into four categories: 3 M. L. Mitchell and E. Stafford, “Managerial Decisions and Long-Term Stock Price Performance,” Jour- nal of Business 73 (2000): 287–329. 4 M. Becht, A. Polo, and S. Rossi, “Does Mandatory Shareholder Voting Prevent Bad Acquisitions? The Case of the United Kingdom,” Journal of Applied Corporate Finance 31, no. 1 (Winter 2019): 42–61. 5 W. Rehm and C. Sivertsen, “A Strong Foundation for M&A in 2010,” McKinsey on Finance, no. 34 (Winter 2010): 17–22. 6 M. Sirower and S. Sahna, “Avoiding the Synergy Trap: Practical Guidance on M&A Decisions for CEOs and Boards,” Journal of Applied Corporate Finance 18, no. 3 (Summer 2006): 83–95. 7 Rehm and Sivertsen, “A Strong Foundation for M&A in 2010.” An unpublished update in 2018 showed similar results. 8 Updated and expanded analysis of W. Rehm, R. Uhlaner, and A. West, “Taking a Longer-Term Look at M&A Value Creation,” McKinsey Quarterly (January 2012), www.mckinsey.com.