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10 Oct 04. Echoing our story last week (BATTLESPACE UPDATE Vol.6 ISSUE 38, 07 October 2004, EADS NORTH AMERICA ACQUIRES RACAL INSTRUMENTS), the FT reports that the US has been a graveyard for acquisitive UK companies, losing shareholders vast sums of money on projects picked for “the wrong reasons”, says new UK academic research.

Alan Gregory, professor of corporate finance at Exeter University, said: “The research shows on average that UK companies make disastrous acquisitions in the US.”

Five-year returns from UK companies acquiring US companies between 1985 and 1994 underperformed stay-at-home companies by 27 per cent.

British acquisitions of EU companies, by comparison, have yielded slightly negative returns short-term but paid off over longer periods.

Prof Gregory, who is also on the panel of the UK’s Competition Commission, said: “The research findings tell us that UK companies are attracted to buy businesses abroad for the wrong reasons: short-term events such as exchange rate fluctuations, growth in share prices and stock markets, and policy decisions by governments, often drive a wave of cross-border acquisitions”. The research, covering UK acquisitions in the US of more than £10m ($17.9m), was prompted by the growth in cross-border acquisitions by UK groups.

UK companies account for more than a third of the world’s cross-border transactions, which have risen markedly in recent years. Most research on the success of acquisitions has focused on short-term effects, for example,share price movements immediately following takeovers.

The exceptions to Exeter University’s findings were acquisitions in industries rich in research and development, for example technology or pharmaceuticals, which have specific advantages such as unique products or patents.

One example, said Prof Gregory, was SmithKline Beecham’s purchase of Sterling Winthrop in 1993 which added “substantial value”. This compared, he said, with less successful deals, including Hanson’s £2.1bn acquisition of Quantum Chemical, English China Clay’s deal to buy Calgon, and Rolls Royce’s £335m acquisition of Allison Engine.

“This underperformance is despite cultural similarities between the US and UK, which might make the job easier”, he said. The Exeter team plans further research to explain why UK companies have done so badly in the US but Prof Gregory attributed some of it to companies overpaying for US opportunities and suffering from inadequate local knowledge.

Comment: Surprisingly the report quotes the Rolls acquisition of Allison which was hailed at the time as a major breakthrough for the company. Perhaps BAE and others should look carefully at this report when planning their US growth strategy for the future.

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