Buy Low, Buy High

Buy Low, Buy High

The recent stock collapse of some high-profile dealmakers has led many executives to pull back from acquisitions.

  • min read


Buy Low, Buy High

The recent stock collapse of some high-profile dealmakers has led many executives to pull back from acquisitions. But our research found that the companies most successful at creating long-term shareholder value tend to be constant acquirers through boom and bust.

They treat acquisitions the way dollar-cost averagers treat mutual funds: They buy low, they buy high. Above all, they buy systematically—winning either as a rising tide lifts stock prices or, even more so, by picking up assets at fire-sale prices.

Consider Cintas. Since the 1960s, the Cincinnati uniform supplier has supplemented its organic growth with a steady diet of small acquisitions. Cintas, methodically, has bought hundreds of companies, in both tough economic environments and boom times. The acquisitions have accounted for 40% of Cintas' revenue growth and leapfrogged the company to first place in its industry. Shareholders gained an average annual return of almost 21%—five percentage points more than the company's cost of equity.

Cintas isn't unique. We studied 724 US companies with 2000 revenues of more than $500 million and examined the 7,475 acquisitions they made from 1986 to 2001. Then we compared the firms' acquisition behavior with excess returns delivered to shareholders.

Simply put, we found that the more deals a company made, the more value it delivered. The "frequent buyers"—those that made more than 20 deals in 15 years—outperformed firms that made one to four deals by a factor of 1.7 and nonbuyers by a factor of almost two, on average.

Not only is frequency important, consistency through economic cycles makes a difference. We split frequent buyers into four groups: constant buyers, which bought consistently through economic cycles; recession buyers, which increased buying in recessionary times; growth buyers, which bought principally in growth periods; and doldrums buyers, which tended to buy in stable or slightly uncertain periods between recession and growth. The constant buyers were by far the most successful, outperforming growth buyers by a factor of 2.3 and doldrums buyers by a factor of 1.8. The recession buyers came in second, outperforming growth buyers by a factor of 1.4.

But it's not just about acquiring consistently. The most successful frequent buyers shared common disciplines. They started with small deals, institutionalized their processes, and created feedback systems to make sure they learned from their mistakes. They continually reviewed targets and kept ready lists of companies they'd buy if the price was right. They built a standing team for dealmaking, got line management involved early in due diligence, and they devised clear guidelines for integrating acquisitions.

Most importantly these frequent buyers excelled at saying "No." Interested parties often have powerful incentives to consummate deals. Successful buyers kill the deal fever by insisting on high-level approval or adjusting incentives to ward off ill-considered acquisitions. Most importantly, they set a walk-away price and are prepared to do exactly that-walk away.

Sam Rovit, a director of Bain & Company in Chicago, leads the firm's corporate transactions practice. Catherine Lemire is a Bain manager in Toronto.

For more on this topic, read "Your Best M&A Strategy," by Sam Rovit and Catherine Lemire, published in the March 2003 issue of the Harvard Business Review

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