While Bain found that the average total shareholder return (TSR) was 4.5 percent for all companies in the 1,600 –plus company sample, “Mountain Climbers”—defined as companies that made more than one deal per year over the 11-year study period and that made acquisitions with a cumulative relative deal size as a percentage of market capitalization of equal to or more than 75 percent—posted annual average TSR of 6.4 percent.
One hundred dollars invested in “Mountain Climbers” in 2000 returned $197 at the end of 2010, versus $163 for all companies analyzed—$34, or 20 percent, more. In comparison, companies that did not conduct any M&A between 2000 and 2010 had an annual average TSR of 3.3 percent. One hundred dollars invested in “Inactives” in 2000 generated $143 by the end of 2010—$20, or approximately 12 percent, less than the sample average.
“The biggest news coming out of our study is that unless you are a material player you don’t move the needle,” said David Harding, co-head of Bain’s Global M&A Practice and lead author of the report. “Doing M&A half way may feel good, but doesn’t generate results.”
For those companies that conducted M&A but weren’t “Mountain Climbers,” two of the four groups Bain identified produced comparable annual TSR as the overall average for all companies: companies that pursued “Serial Bolt-Ons” and “Selected Fill-Ins.” Both groups of acquirers made deals which had relative cumulative deal size of less than or equal to 75 percent, though those in the “Serial Bolt-Ons” group were active acquirers—i.e. making more than one deal per year over the 11 years studied—while those in the “Selected Fill-Ins” group conducted less than one deal per year on average. Notably, says Bain, was the group they refer to in the report as “Large Bettors,” or acquirers who made deals with a cumulative relative deal size as a percentage of market capitalization of more than 75 percent, yet made less than one deal per year on average. “Large Bettors” produced an annual TSR of four percent, below the overall average and the lowest of the four groups. One hundred dollars invested in “Large Bettors” in 2000 returned and generated $154 by the end of 2010—$43, or 22 percent, less than the sample average.
“Swinging for the fences is not a sound M&A strategy,” said Mr. Harding. “Though going after occasional large deals may register a couple of big hits, Bain finds these deals usually fail to pay off.”
According to the report, M&A creates value, if done right, especially with a repeatable model built upon an integrated set of disciplined M&A capabilities, which include:
- Make M&A an extension of a company’s growth strategy—demonstrate a clear logic to identifying targets and clarity on how acquisitions will create value
- Require clarity on how each deal creates value—leverage current capabilities to add value to the target and expand capabilities to create opportunities you didn’t have
- Test the deal thesis versus conventional wisdom—Justify the winning bid and determine where you can add value
- Know what you really need to integrate (and what not to)—Articulate a value creation roadmap and a plan to integrate where it matters
- Mobilize in a focused fashion to capture high-priority sources of value—Nail the shortlist of critical actions you have to get right and execute the long-list of integration tasks stringently
“The gold standard of M&A is a repeatable model,” concluded Mr. Harding. “It’s what gives frequent acquirers a competitive advantage that opportunistic acquirers lack.”
Bain & Company, a global business consulting firm, serves clients on issues of strategy, operations, technology, organization and mergers and acquisitions. With 49 offices in 31 countries, Bain has worked with over 4,600 major multinational, private equity and other corporations across every economic sector (www.bain.com).
© 2013 PEPD • Private Equity’s Leading News Magazine • 3-13-13