Buoyed by powerful economic growth, strong corporate profits and government deregulation, M&A activity in Asia-Pacific has staged a strong recovery from the 2008 financial crisis. In 2010 the value of M&A deals in the region grew 19%. Despite such macro-economic uncertainties as the sovereign debt crisis, deal value rose by 6% in 2011. The region now accounts for about 24% of global M&A. This reflects Asia’s increasingly important position over the next two decades as a growth engine for the world. Asia Pacific’s share of global M&A deals will continue its upswing, despite the current uncertain economic environment and concerns from Western companies about inflated valuations of Asian acquisition targets.
Among the most important developments in Asia’s M&A activity is the rapid rise in outbound deals, which offer a chance to enter new markets, with opportunities for increased distribution, market share, customer ties, and positioning as a low-cost alternative. These deals can also enable a company to buy a brand with strong cachet that can’t be replicated, as China-based Zhejiang Geely achieved with its purchase of Volvo.
But while M&A can deliver great value if well-conceived and properly executed, deals are inherently risky—as is any major growth initiative, whether organic or inorganic. M&A is an area where rookie mistakes are rife and only companies that have carefully built up the required M&A capabilities and experience routinely succeed.
We’ve learned that M&A winners share four traits for success. The first is an M&A strategy linked to the company’s overarching growth strategy. Singapore-based Olam International used acquisitions to grow itself into a leading global supply chain manager for food ingredients and agricultural products. Between 2007 and 2010, Olam completed no fewer than 17 deals, investing a total of $1.4 billion and achieving a 25% return on equity and a 14% return on invested capital from those acquisitions.
What sets Olam apart? The company uses M&A to build leadership positions in its existing businesses, expand into adjacent businesses, overcome entry barriers in new markets, acquire new capabilities, and take advantage of favorably priced targets with high business overlap. Moreover, it has clear guidelines for deal frequency, size, timing, and level of ownership. For example, Olam favors the “string of pearls” approach: Instead of a few headline-making deals, it focuses on a series of small deals, establishing a maximum deal size of 10% of its market cap and a maximum annual deal volume of 15% of its market cap.
Similarly, Indian household and personal care products maker Godrej has used a well-honed acquisition strategy to grow its domestic leadership and international reach. The company spent two years of rigorous preparation before setting foot in the M&A market. It assembled a strong M&A team and developed a playbook including a detailed integration manual and a rigorous screening process to identify the right acquisition candidates. It participates only in emerging market deals, focuses on three core categories (hair care, home care and personal wash) and targets companies with leading positions. This focused approach enables a disciplined screening of potential targets to ensure a strategic fit. Its recent acquisitions are market leaders. For example, Issue Group and Argencos are the hair color leaders in several Latin American markets. In 2010, Godrej’s global business accounted for more than 30% of its revenue, largely fueled by its international acquisitions.
The second trait for successful M&A is a repeatable M&A model that is disciplined and reflects a sustained institutional capability. Olam has a six-member core M&A deal team that works hand-in-hand with business unit leaders through every stage of an acquisition, ensuring that each deal is aligned with the company’s M&A guidelines and corporate strategy. The team creates a detailed investment thesis and performs rigorous due diligence, asking and answering the big questions that will drive most of the business value—a step that dictates integration priorities.
The third essential ingredient for M&A is to focus integration on value creation, tight process control, and quick resolution of people issues. A Southeast Asian retailer used integration to rapidly capture the deal’s value after acquiring a loss-making company. The new managers shut down the most unprofitable retail operations and focused on two core markets, Singapore and Malaysia. The retailer achieved significant cost savings through regional integration. It created synergies by renegotiating volume discounts with suppliers. And it identified and addressed people issues that could threaten a successful integration. Three years after its purchase, the retailer’s revenues grew by 15% a year, three times the market growth rate, and added 13 percentage points to its margins in four years.
The fourth characteristic of successful dealmakers is persistence. In a recent Bain study analyzing 1,615 companies and more than 18,000 deals between 2000 and 2010, we found that frequent acquirers generate superior annual excess returns—on average 1.4 times higher than those of infrequent acquirers and more than double the excess returns of companies not active in M&A. Most successful acquirers make a point of learning from that experience, conducting postmortems and effectively codifying and documenting their M&A efforts.
These four traits of maintaining a well-defined strategy, institutionalizing the M&A program, focusing integration where it matters most, and learning from experience will separate the companies that profit from Asia’s growing M&A marketplace from those that are left behind.
Satish Shankar is a partner in Bain & Company's Singapore office and head of the firm's M&A practice in Asia.