Acquisitions boost performance? What?!

The conventional wisdom, which I would argue is largely true, is that mergers and acquisitions generally fail to produce value for the acquiring company. They distract management from the core business and, because taking out a public company requires a premium, there is a tendency for companies to overpay in buyouts.

But an Ernst & Young study examining 110 new listings in 2006 and the first half of 2007 found that, according (subscription required) to The Wall Street Journal, "Three-quarters of the companies that acquired a stake in or purchased another company after their IPOs outperformed the index, upending the notion that acquisitions distract management from focusing on performance."

In his books, Peter Lynch has mocked most acquisitions as "diworsification", and urged investors to seek out companies that focus on their core businesses. I'm not sure what to make of this data -- could it be a short-term anomaly? There's pretty compelling evidence going back many years showing the acquisitions just aren't a good deal. But perhaps smaller newly-public companies making strategic deals are better-positioned?

The study, which will be released tomorrow, also found that IPOs with lots of institutional investors tend to outperform, as do larger IPOs.