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Get ready for the renaissance in M&A

Looking back at the first decade of this century, it is clear that many companies succeeded in delivering superior shareholder returns using M&A as a weapon for competitive advantage.

글 David Harding and Laura Miles

First published on 4월 03, 2013
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This article originally appeared on Forbes.com. Warren Buffett and Brazil’s 3G Capital are teaming up to buy Heinz, the global food giant. Royalty Pharma wants to acquire Elan, the Irish drugmaker. US retailers OfficeMax and Office Depot are getting together. Our prediction: these and a flurry of other deals in recent weeks are signs of a coming renaissance in mergers and acquisitions. Many business leaders grew leery of any kind of deal making over the past decade. M&A was too risky, they felt; it destroyed more value than it created. Some agreed with a CEO named Ellis Baxter, who responded to a Harvard Business School article questioning the wisdom of acquisitions. “In the end,” wrote Baxter, “M&A is a flawed process, invented by brokers, lawyers and super-sized, ego-based CEOs.” But the historical success of M&A as a growth strategy comes into sharp relief when you look at the data. When we reviewed the last 11 years of deal activity, it showed that the past decade was a very good time for deal makers who followed a repeatable model. Companies that were disciplined acquirers came out the biggest winners. Another surprise: materiality matters. We found the best returns among those companies that invested a significant portion of their market cap in inorganic growth. M&A, in short, was an essential part of successful strat¬egies for profitable growth. And many management teams that avoided deals paid a price for their reticence. Bain & Company’s analysis strongly suggests that executives will need to focus even more on M&A to meet the growth expectations of their investors. As a group, companies that did not engage in any M&A activity averaged 3.3% total shareholder returns (TSR) while those that did deals occasionally averaged 4.8%. (TSR is defined as stock price changes assuming reinvestment of cash dividends). Yet, the most active companies in our study reported TSR of 6.4% — almost double their inactive counterparts. The difference between frequent acquirers and occasional ones is no mystery: experience counts. A company that does more acquisitions is likely to identify the right targets more often, develop the capabilities required to vet deals and build the organizational muscles to be more effective at integrating acquisitions. Stanley Works, for example—now Stanley Black & Decker (SB&D)—embarked on an aggressive M&A program beginning in 2002, and over the next several years it acquired more than 25 companies. It honed operational capabilities to improve the acquired businesses, and it grew more and more successful at realizing synergies through post-merger integration. After acquiring key competitor Black & Decker in 2010, more than doubling its size, it was able to exceed its original savings estimates for the deal by more than 40%. From 2000 through 2010, SB&D recorded annual TSR of 10.3% Perhaps the most surprising part of the analysis was that deal frequency alone was not the key to success. In addition to acquiring frequently, size matters. Those companies that made acquisitions that added a large amount of their market cap did the best. In fact, the more of a company’s market cap that comes from its acquisition, the better its performance is likely to be. We called these companies “mountain climbers”. These companies may be successful because they can find the right deals to do, or it may be that already successful companies are in a better position to do deals. But the implications are clear regardless: a company with a strong business is likely to boost its performance by consistently pursuing M&A, to the point where its deals account for a large fraction of its value. If a company’s business is weak, however, it is highly unlikely that one big deal will turn it around. Mountain climbers’ deals are generally well conceived, reinforcing their strategy. They develop strong capabilities, both for executing deals and for post-merger integration, and they use these capabilities effectively in pursuing large, complex transactions. Look at companies such as Schneider Electric (based in France), Wesfarmers (Australia) or Precision Castparts (US). All have used serial acquisitions effectively to expand into new markets, thus boosting their growth. Such companies often sharpen their acquisition skills on smaller deals, enabling them to move quickly to acquire a larger target when the time is right. Wesfarmers, for example, did about 20 deals in the decade prior to its 2007 acquisition of Coles Group, the large Australian retailer (which more than doubled its market cap). Wesfarmers’ TSR averaged 13.4% a year from 2000 through 2010. Most successful companies develop a repeatable model— a unique, focused set of skills and capabilities that they can apply to new products and new markets over and over. Our own analysis and experience confirm the power of repeat¬ability in the world of M&A. Consider how Anheuser-Busch InBev built its remarkable growth on a foundation of successful merg-ers and acquisitions. Each major deal has allowed the company not only to expand but to increase its EBITDA margin, using well-honed skills both in integrating the merger parties and boosting productivity throughout the new organization. While companies like Anheuser-Busch InBev delivered results through M&A, plenty of firms take a different approach—and pay the price for it. Despite a few notable exceptions, companies sitting on the M&A sidelines lagged the competition, and will likely continue underperforming in the decade ahead. The other below-average group made relatively few acquisitions, averaging less than one a year, but the total value of deals accounted for more than 75% of their market cap. They hoped to improve their business with a couple of big hits, but missed the ball The pressure to grow is only going to increase with time. Looking back at the first decade of this century, it is clear that many companies succeeded in delivering superior shareholder returns using M&A as a weapon for competitive advantage. Executives had to be smart about it, and they had to be committed. But for those with a repeatable model, the rewards were exceptional. Written by David Harding, a partner with Bain & Company in Boston and co-leader of Bain’s Global Mergers & Acquisitions Practice, and Laura Miles, a Bain partner in Atlanta who leads Bain’s M&A practice in the Americas.

This article originally appeared on Forbes.com.

Warren Buffett and Brazil’s 3G Capital are teaming up to buy Heinz, the global food giant. Royalty Pharma wants to acquire Elan, the Irish drugmaker. US retailers OfficeMax and Office Depot are getting together. Our prediction: these and a flurry of other deals in recent weeks are signs of a coming renaissance in mergers and acquisitions.

Many business leaders grew leery of any kind of deal making over the past decade. M&A was too risky, they felt; it destroyed more value than it created. Some agreed with a CEO named Ellis Baxter, who responded to a Harvard Business School article questioning the wisdom of acquisitions. “In the end,” wrote Baxter, “M&A is a flawed process, invented by brokers, lawyers and super-sized, ego-based CEOs.”

But the historical success of M&A as a growth strategy comes into sharp relief when you look at the data. When we reviewed the last 11 years of deal activity, it showed that the past decade was a very good time for deal makers who followed a repeatable model. Companies that were disciplined acquirers came out the biggest winners. Another surprise: materiality matters. We found the best returns among those companies that invested a significant portion of their market cap in inorganic growth.

M&A, in short, was an essential part of successful strat¬egies for profitable growth. And many management teams that avoided deals paid a price for their reticence. Bain & Company’s analysis strongly suggests that executives will need to focus even more on M&A to meet the growth expectations of their investors. As a group, companies that did not engage in any M&A activity averaged 3.3% total shareholder returns (TSR) while those that did deals occasionally averaged 4.8%. (TSR is defined as stock price changes assuming reinvestment of cash dividends). Yet, the most active companies in our study reported TSR of 6.4% — almost double their inactive counterparts.

The difference between frequent acquirers and occasional ones is no mystery: experience counts. A company that does more acquisitions is likely to identify the right targets more often, develop the capabilities required to vet deals and build the organizational muscles to be more effective at integrating acquisitions.

Stanley Works, for example—now Stanley Black & Decker (SB&D)—embarked on an aggressive M&A program beginning in 2002, and over the next several years it acquired more than 25 companies. It honed operational capabilities to improve the acquired businesses, and it grew more and more successful at realizing synergies through post-merger integration. After acquiring key competitor Black & Decker in 2010, more than doubling its size, it was able to exceed its original savings estimates for the deal by more than 40%. From 2000 through 2010, SB&D recorded annual TSR of 10.3%

Perhaps the most surprising part of the analysis was that deal frequency alone was not the key to success. In addition to acquiring frequently, size matters. Those companies that made acquisitions that added a large amount of their market cap did the best. In fact, the more of a company’s market cap that comes from its acquisition, the better its performance is likely to be. We called these companies “mountain climbers”.

These companies may be successful because they can find the right deals to do, or it may be that already successful companies are in a better position to do deals. But the implications are clear regardless: a company with a strong business is likely to boost its performance by consistently pursuing M&A, to the point where its deals account for a large fraction of its value. If a company’s business is weak, however, it is highly unlikely that one big deal will turn it around.

Mountain climbers’ deals are generally well conceived, reinforcing their strategy. They develop strong capabilities, both for executing deals and for post-merger integration, and they use these capabilities effectively in pursuing large, complex transactions.

Look at companies such as Schneider Electric (based in France), Wesfarmers (Australia) or Precision Castparts (US). All have used serial acquisitions effectively to expand into new markets, thus boosting their growth. Such companies often sharpen their acquisition skills on smaller deals, enabling them to move quickly to acquire a larger target when the time is right. Wesfarmers, for example, did about 20 deals in the decade prior to its 2007 acquisition of Coles Group, the large Australian retailer (which more than doubled its market cap). Wesfarmers’ TSR averaged 13.4% a year from 2000 through 2010.

Most successful companies develop a repeatable model— a unique, focused set of skills and capabilities that they can apply to new products and new markets over and over. Our own analysis and experience confirm the power of repeat¬ability in the world of M&A. Consider how Anheuser-Busch InBev built its remarkable growth on a foundation of successful merg-ers and acquisitions. Each major deal has allowed the company not only to expand but to increase its EBITDA margin, using well-honed skills both in integrating the merger parties and boosting productivity throughout the new organization.

While companies like Anheuser-Busch InBev delivered results through M&A, plenty of firms take a different approach—and pay the price for it. Despite a few notable exceptions, companies sitting on the M&A sidelines lagged the competition, and will likely continue underperforming in the decade ahead. The other below-average group made relatively few acquisitions, averaging less than one a year, but the total value of deals accounted for more than 75% of their market cap. They hoped to improve their business with a couple of big hits, but missed the ball

The pressure to grow is only going to increase with time. Looking back at the first decade of this century, it is clear that many companies succeeded in delivering superior shareholder returns using M&A as a weapon for competitive advantage. Executives had to be smart about it, and they had to be committed. But for those with a repeatable model, the rewards were exceptional.

Written by David Harding, a partner with Bain & Company in Boston and co-leader of Bain’s Global Mergers & Acquisitions Practice, and Laura Miles, a Bain partner in Atlanta who leads Bain’s M&A practice in the Americas.