A study by McKinsey of the experiences of the US corporations most active in acquisitions revealed approaches that ensure success for buyers. In particular, such companies do not perceive mergers and acquisitions as a strategy, they use this tool to strengthen their own advantages and involve the most important business units in transactions.
The line between two types of mergers—growth mergers or value-destroying mergers—is very thin. It is no coincidence that companies that frequently carry out mergers and acquisitions act prudently and consistently. To ensure the success of the transaction, they attract the best specialists in this field, change the organizational structure of their departments, create systems, mechanisms and procedures that facilitate integration and help achieve synergies as quickly as possible. However, so many factors influence the future performance of the combined company that it is difficult to say at a glance whether all these efforts will be successful.
To help organizations plan and execute acquisitions intelligently, we reached out to 20 top US executives with the most active acquisition policies and experience[1]. When interviewing business development managers, we first of all wanted to know what they think is the most important thing in mergers and acquisitions, what should be done and what should be avoided. Then, in order to understand what each highly rated stock market company did differently from the rest of our list after the deal, we analyzed the different approaches of these companies and their overall performance during the active phase of acquisitions.
Some of the results of our survey may be useful to companies considering mergers and acquisitions. For example, we found that the most successful acquiring companies tend to perceive mergers and acquisitions as a tool to support the strategy, and not as the strategy itself. Moreover, through acquisitions, they strengthen and develop their unique capabilities and skills. Their leaders realize that it is far from always possible to achieve the intended goal of retaining qualified managers and obtaining operational know-how of the acquired company. In addition, depending on the type of integration, they involve business units in the integration process in different ways.
Our interlocutors believe that even a strong dedicated team of ex-investment bankers and lawyers does not guarantee the success of a deal, and this opinion is contrary to conventional wisdom on mergers and acquisitions. The stock market can both favor and reject a company that has attracted talented M&A professionals to the deal, especially since there are quite a lot of them in America. What really matters to the market is the seniority of the acquiring company’s executives: the higher it is, the more favorably the market perceives the deal. If a company does not have a coherent approach to acquisitions and integration, then it is pointless to try to salvage the situation at the expense of other necessary factors – organizational structure, people, systems, tools and processes.
Mergers and acquisitions as a tool, not a strategy
Many companies act as if acquisitions are their growth strategy. They make one purchase after another for the sake of overall growth, while having a very vague idea of \u200b\u200bhow to ensure growth after the merger is completed and they receive all possible synergies – they do not have a clear plan for this. Buying another business can be a very effective short-term value-adding measure, but companies that only bet on takeovers inevitably flounder when there are fewer takeover assets promising to increase value, or when the activities of companies are in clear conflict with the requirements legislation. Investors immediately feel that the company has exhausted its growth potential through acquisitions: after that, its share price “sags”, reflecting the expected slowdown in growth.
The executives we interviewed, listing the goals for which their companies made acquisitions, named, among other things, building opportunities, geographic expansion, and “acquisition” of growth, that is, they said what they usually say in such cases. But they emphasized that mergers and acquisitions are not a self-sufficient strategy, but only a tool to fill gaps in the strategy (for example, diversify assets or expand the geography of presence), which cannot be eliminated as effectively through organic growth alone. Here’s what the chief strategy officer at a consumer-sector company told us: “Once we have a corporate strategy in place, we start thinking about how to execute it and look for opportunities, both through organic growth and through M&A.
We don’t just fish for good acquisitions, we execute the strategy.” None of the top-performing companies made defensive acquisitions to block out a competitor, a fact that proves once again that the success of successful buyers is due to the relentless pursuit of a common strategy. The M&A strategy of these companies is proactive: they try to anticipate a change in the situation, rather than waiting for the change in the situation to take the company by surprise.
We do not want to belittle the role of acquisitions in the overall strategy of the company.
Done right, they turn out to be an essential component of a large company’s growth strategy: recent McKinsey research shows that many large companies’ long-term growth of more than a third comes from acquisitions. However, these transactions should be viewed in the context of the overall corporate strategy.
For example, a high-tech company achieved its dual strategic goal of reducing costs and becoming a leader in the industry through acquisitions and organic growth. Organic growth alone would have taken too long to achieve this goal, and it was important for the company to quickly establish its presence throughout the country and capture market share at an early stage of the industry cycle. Either way, an organic growth strategy would be extremely expensive. Partnership with another player allowed the company to meet the allotted time frame, but promised only a small part of the potential profitability. In addition, neither organic growth nor partnerships would allow the company to cut costs. Covering the entire country, making a profit, and at the same time achieving significant synergies in terms of costs can only be achieved through a merger with a competitor or its acquisition. Therefore, the company completed the merger at a price not exceeding the market price, and the increase in its value was almost twice the cost of the merger. One success factor was the combined company’s ability to sustain organic growth, which has nearly doubled in five years. Compare this to the experience of a financial sector company that grew mainly through acquisitions in the 1990s. When it realized all the synergies, its stock price soared, and the company far outperformed its competitors. However, despite strong overall growth and strong share appreciation, there was no organic growth. There were fewer and fewer easy “victims” of takeovers, and the company’s stock price began to fall: since then, its performance has been significantly worse than that of similar companies. This is partly because the company’s organic growth is still lagging behind that of the entire economy.
Participation of business units
Fatal for the transaction is often the integration stage of the acquisition: judging by the results of some studies, up to 70% of all failures are associated with misses at this stage. The vast majority of buyer executives surveyed believe that business units are responsible for integration. This is not to say that they are to blame for all the failures, but this is what one business development manager says: “The hardest thing is getting the merger team and business unit heads to work as one.” This is a very important note. Typically, acquiring companies try to establish such interaction by officially distributing the powers of all participants in the transaction, approving the appropriate procedures and tools for monitoring the integration process. But skillful buyers, unlike losers, dot the i’s even in the early stages of the merger, in particular during due diligence. In addition, they document all procedures more clearly than others.