In the first half of this year alone, companies announced 19,932 mergers and acquisitions worth $1.8 trillion – the highest value since the first half of 2007, according to Dealogic.
But there is a real risk that the acquiring companies could end up worse off, unless they take a fundamentally different tack to evaluating investments. Standard investment opportunity assessment tools that are based on hurdle rates determined by weight-adjusted costs of capital are proving to be flawed for several reasons: First, non‑financial risks, such as regulatory and strategic risks, are typically not captured in such cost of capital allocations, even though they can dramatically affect business performance. Second, there is a tendency for companies to make capital allocation decisions on a stand-alone basis, as opposed to examining their impact on their entire portfolio of businesses. Third, many firms lack the capability to evaluate their future corporate portfolio’s performance under a range of market and strategic scenarios.
