Successful M&A Strategies
Five M&A strategy considerations that have proven to increase the likelihood of successful M&A across industries over time.
Acquisitions can significantly accelerate top line growth and often make the headlines, but the failure rate of M&A is extremely high – measured in net financial value creation. Extensive studies and research show failure rates for M&A deals ranging from 50%1 and up to as high as 90%2. In our own 2016 pan-Nordic M&A survey, respondents from across the Nordic M&A community – including business development, line management and private equity – rate only 62% of their own deals as successful. However, studies also show that companies that are actively engaged in M&A, i.e. frequent acquirers, on average over a multi-year period outperform inactive M&A companies, i.e. companies that do not make any deals, in terms of total shareholder return results generation3. This begs the question: What is it that the most successful acquirers do to achieve success?
Our guide is meant as a practical reference handbook on how to increase the likelihood of M&A success for business executives who may not already have significant M&A experience. In this introduction, we share tools, methods and insights that are tried and tested and have proven to increase the likelihood of M&A success over time. It is not our ambition to provide an exhaustive guide to how to manage all M&A situations, but focus is on the following three themes:
Successful M&A strategies – outlining five M&A strategy considerations that have proven to increase the likelihood of successful M&A across industries over time.
Due diligence success factors – focused on practical tips and tools, including due diligence for commercial, operational, supply chain, IT as well as leadership and team.
Read article 2
Success factors for post-deal impact – outlining key considerations for impact post deal, which synergies have the highest success rates and the key to realising these synergies.
Read article 3
Each theme is published as a separate article. This article focuses on the first theme: Successful M&A strategies.
We share findings based on our experience from working on a large number of pre-deal and post-deal situations, our latest 2016 pan-Nordic M&A survey and the recent M&A with Impact event in Stockholm where +40 senior M&A professionals shared their insights, tools and experience with how to improve the odds of M&A success.
The plethora of recent surveys probing CEOs’ concerns point to the same conclusion – most CEOs’ biggest worry is profitable growth. Yet, only a handful of corporate CEOs and managers succeed in driving growth successfully and profitably. M&A is often seen as a vehicle to boost corporate performance or jump-start long-term growth, not only by becoming bigger and more competitive, but also by helping accelerate innovation creation and realisation and ultimately driving profitable growth.
Yet, the downside risks are immense, and study after study point to high failure rates in M&A. While M&A is important, it can no doubt hinder as well, should it be done the wrong way.
Damned if you do....
As previously highlighted, many research studies show that the failure rate of M&A, measured in net financial value creation, ranges from 50%4 and up to as high as 90%5. Results from our recent pan-Nordic M&A with Impact survey6 found that, on average, 62% of deals are considered successful (based on a subjective self-evaluation), which is a slightly higher success rate than some of the aforementioned international studies, but it still points to a very risky undertaking. Across industries and geographies, historical examples of failed M&A deals abound.
Hewlett-Packard purchased Autonomy, a UK-based enterprise software company, for a price of $ 10.2bn in 2011. The absorption of Autonomy into its parent company was uneventful, and HP’s management argued that Autonomy was overpriced, with HP eventually ending up taking a $ 8.8bn write-off.
In 1998, Daimler merged with Chrysler via a $ 39bn stock swap, and, shortly thereafter, disgruntled Chrysler shareholders filed a class-action lawsuit, costing DaimlerChrysler’s CEO his job. In 2007, Daimler divested this expensive unit and sold it to a private equity firm, Cerberus Capital Management, for a price of $ 7.4bn. Two years later, Chrysler’s new owners filed for bankruptcy, supported by a tax payer-funded bailout.
In 2007, to compete with Google who was making similar inroads, Microsoft purchased aQuantive, a digital marketing company, for a price of $ 6.3bn at an 85% premium based on the justification that online advertising would be the hot new industry. This later proved to be meaningfully overpriced.
In April 2010, Hewlett-Packard purchased Palm, a company synonymous with mobile devices. Unfortunately, Palm had last been synonymous with mobile devices about a decade earlier with an antiquated operating system and cheap hardware and has since been reduced to a small open-source project.
In 2000, America Online (AOL), then known mostly as an online access provider, bought “old media” firm Time Warner for a price of $ 164bn. Within 18 months, the company reported a $ 99bn loss, with the combined value of the company plunging from $ 226bn to $ 20bn
Yet, instead of only focusing on the difficulties of M&A and worrying about the statistics highlighting the failure rate of deals, companies should perhaps divert their attention to building and reinforcing their M&A capabilities to help them win in the marketplace.
While individual deals may be declared failures after a few years, seeing the long-term trends requires long-term data. A very comprehensive international study shows that frequent acquirers (i.e. companies who often conduct M&A) on average outperform companies not active in M&A in the long run in terms of total shareholder value creation8.
Damned if you don’t.....
Experience matters, and it is of no surprise that frequent and constant acquirers outperform in the long run. A company that undertakes more acquisitions is not just likely to identify the right targets more frequently, but is also likely to be more discerning when conducting the due diligence required to evaluate the deals. It is also expected to be more effective at integrating the acquired company and realising potential synergies.
ASSA ABLOY: ASSA ABLOY has made over 200 acquisitions since the group was formed in 1994 to 2015 and has a target of 5% acquired growth over a business cycle. Their acquisition strategy is focused on three areas:
Consequently, the company has doubled their sales in roughly 10 years, achieved steady, high profitability of approx. 16% EBIT and successfully managed out cost synergies9. ASSA ABLOY has also boosted their innovation capabilities and has been recognised by Forbes as one of the world’s top 100 innovative companies in 2013, 2014 and 2016.
Indutrade: Indutrade has a long record of experience in company acquisitions, with more than 100 companies acquired over the last decade, which have accounted for a large share of Indutrade’s sales growth (average annual sales growth of 12% since their IPO in 2005). Future growth is also expected to be achieved in part through company acquisitions. The company has a 788% TSR (in 2016), including reinvested dividends since IPO 200510.
Atlas Copco: A good example of a successful serial acquirer is Atlas Copco that has conducted 86 acquisitions from 2004-2015, which are primarily made in, or very close to, the already existing core businesses. They adopt a clear acquisition strategy of which acquisitions and divestments are made to strengthen the core business11.
Having established the challenges and great difficulty in conducting successful deals, yet bearing in mind that frequent acquirers outperform in the long run, how is it then possible for companies to approach M&A while increasing their odds of success?
The copious volumes of literature available on M&A and valuable insights imparted from key thought leaders from all over the world all point to five key successful M&A strategy considerations that should be acted upon, should a company decide to go down the route of pursuing M&A. It is interesting to note that the various concepts drawn across these international thought studies fall together nicely in complementary, rather than contradictory ways.
Research from Profit from the Core illustrates that it is difficult (i.e. only about 1 in 10 companies) to deliver profitable growth over a long period of time (e.g. 10 years), and that companies that do manage to deliver long-term sustainable profitable growth are typically leaders in their core business(es). As such, developing a successful growth strategy requires possessing a distinct definition of business boundaries as well as the company’s core.
A company’s profitable core is centred around a company’s most robust position in terms of products, customer segments, technologies and unique skills with which a company can build the greatest competitive advantage. The profitable core could be a distinct business, a subset of a business, or it may be made up of elements of several businesses.
Growth opportunities in turn can be characterised by how closely they relate to a strong core business, ranging from organic growth in the core to pure diversification, as characterised by the extent of adjacency a new business acquisition would take you.
The closer any adjacency move is to the core business (i.e. in terms of customer, costs, channels and capability sharing), the more likely it is to succeed – logically as companies are more likely to succeed in areas of business growth they know something about. From an M&A perspective, it is then important to know what, if you are targeting deals in or close to the company’s existing core business.
In summary, there are five successful M&A strategy considerations that will help companies increase their odds of success:
After having defined the core business, mapping adjacencies and evaluating the available growth options, then it is advisable to prioritise the options. Prioritisation typically involves mapping out opportunities by taking into account each investment as well as the corresponding value upside (e.g. sales x profit) and associated risk or closeness to the core, to get a measure of likelihood of success. Below is an example of such a mapping exercise (figure 1):
While an average undoubtedly provides a useful picture of growth or performance, the granularity of growth should not be ignored. Executives should make granular choices when approaching portfolio decisions and allocating resources towards businesses, countries, customers and products that have plenty of headroom for growth. For example, the Scandinavian construction market as a whole could be growing at a low single-digit growth rate, but pockets of growth could exist in specific countries or regions, exhibiting more attractive growth rates that could be capitalised on.
As another illustration, despite being often identified as a mature industry in Europe, the revenue of ten large European telcos exhibited average annual growth of 9.5% from 1999 to 2005, while individual companies expanded by between 1 and 25% annually, simply because of the fact that the European telcos made different portfolio choices so that they had varying degrees of exposure to different segments with different rates of growth, ranging from wireless to fixed line. The growth rates of each also varied widely by country and levels of exposure to fast-growing markets outside Europe.
Another example of the importance of growth granularity is that the growth rates of companies vary more within an industry vs the variation between industry average growth rates (see figure 2). This is why it is important to target deals in attractive segments, at a granular level and avoid misleading averages.
To determine strategic M&A growth options and find the most suitable M&A targets at a granular level, a company must consider three important factors:
Firstly, determining market attractiveness involves considering factors such as market size, growth, profitability, capital intensity and barriers to entry.
The competitive position and ability to win are also crucial and include assessing market share, relative market share (RMS, i.e. market share relative to largest competitor in correctly defined business), differential capabilities (e.g. Net Promoter Score, i.e. customer satisfaction and loyalty), relative profitability/cost position and, as mentioned in the previous section, closeness to the core (i.e. share customers, costs, channels, capabilities and competition).
The final relevant consideration is the financial performance of the target business, including sales, sales growth, profitability, capital employed (environmental, health and safety, maintenance, NWC, growth investments) and return on capital employed. Taking into account market attractiveness vs the competitive position and the ability to win (RMS), possible implications for M&A strategies could include:
Companies that concentrate only on what they are going to gain from an acquisition are less likely to succeed than those that also consider what they can offer to an acquired company. Companies that enter an attractive market through acquisitions using a take only-based market entry often fail. If the acquirer has something that will render an acquired company more competitive, however, the picture changes, and the acquirer becomes a “good parent”.
As long as the acquisition cannot make that enhancement on its own or – ideally – with any other acquirer, the acquirer, rather than the seller, will reap the benefits resulting from the deal. An acquirer can typically improve its target’s competitiveness through four means:
Experience in M&A is crucial. Undertaking acquisitions more frequently and constantly allows building mastery in M&A, which increases the odds of success in the long run. As stated in the previously mentioned Mastering the merger study on M&A frequency (analysing companies in the period from 1986 to 2001), frequent acquirers outperform non-acquirer companies in financial performance. Interestingly, a similar, more recent M&A study16 comes to the same conclusion.
This study analysed annual total shareholder return growth for >1,600 diverse publicly listed companies that completed >18,000 deals during a period from 2000 to 2010 –and the results of this review also show that active deal-making pays off in the long run. In fact, companies actively engaged in M&A (conducting many acquisitions during the time period) outperformed inactive companies (i.e. companies not conducting any or very limited acquisitions), not just in total shareholder return (TSR) growth by more than 50%, but also in sales and profit growth.
Early development of a meaningful deal thesis derived from a company’s strategy pays off. 90% of successful deals started with such a thesis, compared with only 50% of failed deals17. As the Implement Consulting Group M&A with Impact survey reveals (figure 3), most respondents agree with this and view the key success factors when conducting due diligence as being fully clear about and ensuring the value creation potential of the deal that management can deliver, as well as that the business is attractive and a strategic fit (the last point is obviously more relevant to acquisitions involving some degree of merger of the operations and less relevant to stand-alone acquisitions). Interestingly, timing of deal-making is considered less important – a finding that is also concluded in the Mastering the merger analysis, i.e. that constant acquirers outperform acquirers only buying in recession or growth environments.
Taking into account the five successful M&A strategy considerations, an M&A strategy and target list must then be developed based on the following four aspects (figure 4).
The first involves deciding on the investment theme, which entails coming up with a logic to identify the targets based on the closeness to core concept and the 4 other successful M&A strategy considerations as discussed previously, see example on figure 5. In addition, it must be determined if the company’s objective would be fulfilled through a scale deal or scope deal. Also, it is necessary to identify the geography of interest, the size of the deal and whether the intention is to achieve repeatability (number of deals).”
This involves focusing on the market size and growth, the profit levels and the degree of fragmentation of the industry. Also, it involves determining the scale/scope of value-added benefits and whether the deal could contriute to applying, expanding and filling capabilities.
It is useful to develop a database of target companies to acquire and assess each company based on fit, availability, attractiveness as well as likely price vs value added.
Finally, start to approach the list of companies on the target list about the interest and availability of a possible M&A. Approaches can be done directly and indirectly in many ways. When doing so, prepare the win-win story and value-added roadmap for each target company to help ensure a positive outcome. Initial approaches are done to gauge the interest and feasibility of a possible M&A. If interest and feasibility are positive, then the process typically leads to due diligence and negotiations.
Before finalising a deal, it is important to ensure that no regulatory constraints can stop the deal – one example of this happening was the merger between Volvo and Scania trucks in the late 1990s which was stopped based on the regulatory view that this combination would create too strong a company in certain European markets, including Sweden.
Also, before a deal is closed, it is important to have a relatively clear post-deal plan, including steps to integrate the companies where it matters.
We will share more of this later in the forthcoming articles 2 which is about: Due diligence success factors focused on practical tips and tools including due diligence for commercial, operational, supply chain, IT as well as leadership and team and article 3 which is about: Success factors for post-deal impact outlining key considerations for impact post deal, which synergies have the highest success rates and the key to realising these synergies.
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