M&A remains an effective way for companies to maximize shareholder returns. But David Harding, an advisory partner with Bain’s Mergers & Acquisitions practice, discusses how executives now need to acquire new capabilities in an environment where scope investments are surpassing scale deals.
Read the Bain Report: Using M&A to Ride the Tide of Disruption
Read the transcript below.
DAVID HARDING: It's interesting to think about what has and hasn't changed in the world of mergers and acquisitions over the last several years. What hasn't changed, if you're an executive wanting to reward your shareholders, is a commitment to a repeatable model of M&A. We know that total shareholder return is maximized when companies grow their operating earnings consistently over time. And the market doesn't care whether or not that operating earnings growth comes from M&A or comes from organic investments.
There are a set of companies that we truly admire called mountain climbers. These are companies that participate in the M&A market in a material way and frequently. And when we look at their return profile, it is almost 2x the returns of companies that either don't participate in M&A at all or only participate episodically.
So the repeatable model continues to be the benchmark. What is new is that executives are grappling with the wave of disruption that is taking place across the economy, either to be disrupters or worried about being disrupted. So things like digital, technology, software, new ways of doing things are on every executive's mind.
And many of them are grappling with "Do we do this internally, or do we try to buy it?" And oftentimes now they're concluding that they're going to buy it, even though the prices for many of these assets are exorbitant. But what they realize is that they need capabilities, new ways of doing things. And so they are making these investments, which aren't like old scale investments. In fact, they're scope investments.
And in 2018, for the first time in history, the number of scope deals actually exceeded traditional scale deals. This is profound as executives think about how they're going to screen, diligence, integrate and ultimately manage these businesses. But what we do know is the companies that have a repeatable model for managing these scope deals will be the most successful going forward.