- Mergers and acquisitions are about to undergo a renaissance.
- Companies that were active in M&A, the data shows consistently outperformed those that stayed away from deals. Companies that did the most deals, and whose cumulative deal making accounted for a larger fraction of their market capitalization, turned in the best performance of all.
- As a group, companies that engaged in any M&A activity averaged 4.8% annual TSR, compared with 3.3% for those that were inactive.
- Companies that did a lot of deals outperformed the average most often when the cumulative value of their acquisitions over the 11-year period amounted to a large percentage of their market capitalization.
- Companies that built their growth on M&A—those that acquired frequently and at a material level—recorded TSR nearly two percentage points higher than the average.
- The difference between frequent acquirers and occasional ones is hardly a mystery. Experience counts. A company that does more acquisitions is likely to identify the right targets more often. It is likely to be sharper in conducting the due diligence required to vet the deals. It is also likely to be more effective at integrating the acquired company and realizing potential synergies.
- The more of a company’s market cap that comes from its acquisitions, the better its performance is likely to be. In fact, companies making acquisitions totaling more than 75% of their market cap outperformed the inactives by 2.3 percentage points a year, and they outperformed the more modest acquirers by one percentage point a year.
- Most successful companies develop a repeatable model—a unique, focused set of skills and capabilities that they can apply to new products and new markets over and over.
- The pressure to grow is only going to increase with time. Looking back at the first decade of this century, it is clear that many companies succeeded in delivering superior shareholder returns using M&A as a weapon for competitive advantage.
- A strategy focused on organic growth alone is unlikely to deliver the expanded capabilities or market penetration they need. Most companies will have to rely on a balanced strategy, pursuing M&A as well. In many cases it is faster and safer to buy an asset than to invest in building your own.
- Academic research has repeatedly confirmed that about two-thirds of all mergers and acquisitions among public companies destroy value for the acquirer, at least in the short term. Even when acquirers justify deals by pointing out the ample synergy opportunities that they offer, capital markets remain skeptical. Yet a significant minority of acquisitions do manage to create value for the owners of both the acquirer and the target, demonstrating that despite the doubters in the capital markets, the overriding M&A rationale—value creation—remains valid.
- Most acquirers seek to create value by capturing cost synergies. But there is more to value creation than simply identifying synergies and executing strategies to realize those synergies. The Boston Consulting Group teamed up with the TechnischeUniversitätMünchen (TUM) to compile new research demonstrating that in successful deals, buyers and sellers share the synergies. Acquirers cannot expect to capture 100 percent of those synergies for themselves; sellers will anticipate the buyers’ synergies and demand takeover premiums, reasoning that the target is worth more in the hands of the acquirers than in their own. Our research suggests that sellers collect, on average, 31 percent of the average capitalized value of expected synergies. However, in practice, the seller’s share varies widely.
- By sharing the value of synergies with the seller, the acquirer can pay a price that induces the seller to conduct the transaction while still enabling both acquirer and seller to create value for their shareholders. Further, by disclosing the value of potential synergies at the time of an acquisition, the acquirer can shore up its market valuation during the period following the merger announcement, offsetting the erosion in market value that frequently occurs as investors react to the uncertainty engendered by such announcements.
- PMI (Post Merger Integration) actually begins the moment the deal is announced, when management communicates the rationale for the transaction and quantifies the synergies that shareholders can expect. Recent M&A history conclusively demonstrates that shareholders welcome details about the logic underlying a transaction and reward communicative acquirers with higher-than-expected valuations during the period after merger announcements. The valuations of acquirers that quantify synergies as part of merger announcements are roughly 5 percent higher, on average, than those of acquirers that make no such disclosure, while the valuation of the combined companies is approximately 6 percent higher than it is for comparable companies that don’t disclose synergies.
- All the communication in the world, however, cannot preserve the value of a combined company that fails to deliver against the synergy expectations it creates.
- In our experience, companies are more successful at M&A when they apply the same focus, consistency, and professionalism to do it as they do other critical disciplines. This requires building four often-neglected institutional capabilities: engaging in M&A thematically, managing your reputation as an acquirer, confirming the strategic vision, and managing synergy targets across the M&A lifecycle. This ability to approach M&A in this way elevates it from a tactical necessity focused on risk management to a strategic capability delivering a competitive advantage that others will struggle to replicate.
Source: Bain & Company Publications, Insights: “The Renaissance in Mergers and Acquisitions: The Surprising Lessons of the 2000s”, January 16, 2013; “The Renaissance in Mergers and Acquisitions: What to do With All That Cash”, March 13, 2013; 2BCG Perspectives: “How Successful M&A Deals Split the Synergies: Divide and Conquer”, March 27, 2013, Ferrer, Uhlaner, West, “M&A as Competitive Advantage”, McKinsey Quarterly, August 2013.