Everyone says that mergers and acquisitions mostly fail. Now Bain & Co. brings a challenge to the received wisdom. The “Big Three” consulting firm says companies engaging in regular M&A actually deliver better returns than those who resist the urge to merge.
But there’s a notable caveat that keeps the skeptical mantra alive — the bigger the deal, the more likely it will end in tears.
Bain’s research is manna for anyone who garners fees from transactions — bankers, lawyers, spin doctors, not to mention its own corps of management consultants. Companies doing occasional M&A outperformed those focused solely on organic growth in the decades ending 2010, 2020 and 2022, Bain found. Those that did one or more deals a year performed even better. The natural conclusion? Every company needs an M&A strategy and should keep at it throughout the economic cycle. That’s slide 1 of the pitchbook sorted.
The observation echoes similar findings by the Boston-based firm from 2004, when Bain looked at why dealmaking persisted despite mega-disasters like the AOL-Time Warner combination. But, more than $50 trillion of transactions later, the evidence in favor of doing regular, manageable M&A has become more pronounced. The outperformance of the frequent acquirers versus the non-acquirers was more than twice as good in 2012-2022 as 2000-2010.
There’s more. Bain’s surveys of executives two decades ago found that 60% of transactions failed to hit internal targets. Now, executives report that close to 70% of deals succeed.
Common sense suggests digestible dealmaking ought to do well. Companies don’t normally embark on a takeover unless they anticipate benefits from eliminating duplicated costs, cross-selling to each side’s customers or accelerating entry into new markets. Frequent M&A necessarily involves a series of relatively small targets. Such transactions should be easier to integrate; the acquirer’s management team will be calling the shots without the governance fudge of fusing two similar-sized enterprises. There’s also less risk that the deal becomes a distraction.
Companies that get takeovers right will find their shareholders encourage them to do more. Experience of combining operations begets success, which in turn begets more deals and more learning. The firms that mess it up presumably kick the habit.
That still leaves the question of why the relative benefit of frequent M&A grew during the second decade of this century. One answer could be that the cheap-money era favored companies that chose to expand. For its part, Bain suggests that acquirers have simply become better at it. Due diligence has become more comprehensive. Buyers probe areas they didn’t previously, like the culture of the target. Websites provide a window on employee and customer satisfaction. Sniffing around networks of contacts can provide intelligence on the state of the business that’s not in the published numbers.
Shareholders still need to be vigilant. The fact remains that the bigger the target, the higher the chances things go awry. Bain looked at acquirers whose cumulative purchases were large relative to their market capitalization. The ones that dined regularly - say, drinks giant Constellation Brands Inc. - did far better than those who binged selectively. Due diligence hasn’t improved sufficiently to mitigate the risks that go with a jumbo transaction; precautionary work around the inevitable people issues could still be improved. As the consultancy says, making big bets has proved enduringly risky, “which is why the best acquirers avoid it.”
The latest crop of big M&A to mature shows the problem — from Bayer AG’s lamentable purchase of seed-maker Monsanto, to Unibail-Rodamco-Westfield’s leveraged expansion in shopping malls before the pandemic and Fidelity National Information Services Inc.’s botched acquisition of payments peer Worldpay. The “transformational” deal often delivers on its promise in a bad way.
Such misadventures explain why the market reacts so badly to proposed acquisitions where management may be biting off more that it can chew, especially when debts will rise. Witness the revolt in 2022 against Unilever Plc’s attempted purchase of GSK Plc’s consumer business.
Seasoned acquirers deserve the benefit of the doubt. But dealmaking for its own sake doesn’t guarantee improved performance. Where an acquisition is about gaining scale, the question is whether the buying bosses will be able to run the target better. Where it’s about obtaining new capabilities, investors should satisfy themselves the aspiring owner can preserve rather than squash the culture being subsumed. If the answer is no, or the target is just plain massive, shareholders shouldn’t be afraid to deploy the old cliche about failed M&A.
© 2024 Bloomberg L.P.
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