As Sanofi-Aventis and Genzyme warily circle each other after the former's $18.5 billion offer for the latter, it's worth noting that conventional wisdom is often wrong about which mergers and acquisitions in health care will succeed and which will fail. People generally think health care deals in general are very risky, with all the technical, regulatory and commercial issues involved. But a Bain & Co. study of deals between 1995 and 2008 shows surprising results: Almost 60% of those completed by health care companies had higher returns than related pharma and med-tech indexes in the year following the deal.

No two deals are the same, of course, but those successful ones shared some common characteristics. For starters, the acquirers steadily built the muscles for them through frequent acquisitions. When we analyzed the average annual excess returns of health care deals between 1995 and 2008, we found that companies that acquired frequently—closing approximately one transaction a year—posted the highest returns. In the last two decades, companies including Abbot Laboratories, Medtronic, Pfizer and Roche have each successfully invested in more than two dozen deals. Maintaining a regular pace of M&A activity has helped them build their ability to execute deals well. On the other hand, infrequent acquirers who took on large health care deals have performed the worst. Many of them rolled the dice, failed in execution and lost value for shareholders.

Along with frequency, the size of the deals matters too. Pharma and med-tech manufacturers that focus on smaller "tuck-in" acquisitions tend to do better than those that pursue larger ones, especially from a position of weakness. Companies that pursue a "string of pearls" strategy, frequently acquiring smaller assets, deliver sustainable, higher returns. Generally they post excess returns close to 3.5%, compared with less than 1% for those that pursue only larger deals. The chances of success increase when companies invest close to their core by capitalizing on existing customer relationships or capabilities. For example, between December 2008 and December 2009, Johnson & Johnson's Ethicon unit successfully acquired three companies—Omrix (biosurgicals), Mentor (aesthetic med-tech) and Acclarent (ear, nose and throat devices). Each acquisition found a place in the company's existing product and technology portfolio.

Another distinguishing feature: Successful health care acquirers invest when others don't. The more broad-based and extended the downturn, the greater the opportunity for the right pharma or med-tech company to create value through a merger or acquisition. For example in the 2001 recession, health care acquirers generated higher returns than any other industry except telecom and energy. During the downturn, those pharma and med-tech companies outperformed the industry indexes by 17%; in the preceding period of "irrational exuberance" between 1998 and 2000 they had outperformed the indexes by just 6%. It's hardly surprising then that some of the biggest pharma deals in history—Roche-Genentech, Pfizer-Wyeth, and Merck with Schering-Plough—took place in the last 20 months, during a deep global downturn.

Read the full article on Forbes.com