Mergers and acquisitions “mountain climbers” poised to outpace deal-making competition in 2013

New 11-Year Global Study of 18,000 deals involving more than 1,600 companies finds that playing big in M&A generates the greatest shareholder returns; “Make major commitment to M&A, or don’t bother”

May 08, 2013 Dubai
Dubai, UAE - M&A creates the most value when it’s frequent and material over time; this according to a new, far-reaching report entitled, “The M&A Renaissance,” released recently by Bain & Company, the global business consulting firm. While Bain found that the average total shareholder return (TSR) was 4.5 per cent for all companies in the 1,600 –plus company sample, “Mountain Climbers”—defined as companies that made more than one deal per year over the 11-year study period and that made acquisitions with a cumulative relative deal size as a percentage of market capitalization of equal to or more than 75 per cent—posted annual average TSR of 6.4 per cent. One hundred dollars invested in “Mountain Climbers” in 2000 returned USD 197 at the end of 2010, versus USD 163 for all companies analyzed—USD 34, or 20 per cent, more. In comparison, companies that did not conduct any M&A between 2000 and 2010 had an annual average TSR of 3.3 per cent. One hundred dollars invested in “Inactives” in 2000 generated USD 143 by the end of 2010—USD 20, or approximately 12 per cent, less than the sample average.

“The biggest news coming out of our study is that unless you are a material player you don’t move the needle,” said David Harding, co-head of Bain’s Global M&A Practice and lead author of the report. “Doing M&A half way may feel good, but doesn’t generate results.”

For those companies that conducted M&A but weren’t “Mountain Climbers,” two of the four groups Bain identified produced comparable annual TSR as the overall average for all companies: companies that pursued “Serial Bolt-Ons” and “Selected Fill-Ins.” Both groups of acquirers made deals which had relative cumulative deal size of less than or equal to 75 per cent, though those in the “Serial Bolt-Ons” group were active acquirers—i.e. making more than one deal per year over the 11 years studied—while those in the “Selected Fill-Ins” group conducted less than one deal per year on average. Notably, says Bain, was the group they refer to in the report as “Large Bettors,” or acquirers who made deals with a cumulative relative deal size as a percentage of market capitalization of more than 75 per cent, yet made less than one deal per year on average. “Large Bettors” produced an annual TSR of four per cent, below the overall average and the lowest of the four groups. One hundred dollars invested in “Large Bettors” in 2000 returned and generated USD 154 by the end of 2010—USD 43, or 22 per cent, less than the sample average.

“Swinging for the fences is not a sound M&A strategy,” added Harding. “Though going after occasional large deals may register a couple of big hits, Bain finds these deals usually fail to pay off.”

According to the report, M&A creates value, if done right, especially with a repeatable model built upon an integrated set of disciplined M&A capabilities, which include:

• Make M&A an extension of a company’s growth strategy—demonstrate a clear logic to identifying targets and clarity on how acquisitions will create value
• Require clarity on how each deal creates value—leverage current capabilities to add value to the target and expand capabilities to create opportunities you didn’t have
• Test the deal thesis versus conventional wisdom—Justify the winning bid and determine where you can add value
• Know what you really need to integrate (and what not to)—Articulate value creation roadmap and a plan to integrate where it matters
• Mobilize in a focused fashion to capture high-priority sources of value—Nail the shortlist of critical actions you have to get right and execute the long-list of integration tasks stringently

“The gold standard of M&A is a repeatable model,” concluded Harding. “It’s what gives frequent acquirers a competitive advantage that opportunistic acquirers lack.”

Philippe Debacker, Middle East Partner, Bain & Company said, “In the Middle East and North Africa region, a significant amount of M&A activity is being observed in the banking sector. Years ago, western markets saw a great deal of consolidation in their banking industries. However, with the recent resurgence in our region and an ever maturing banking environment, we will see this phenomenon also play out in the GCC. In fact, this is already happening, exemplified by GCC banks having recently pursued acquisitions in Egypt, Turkey and other emerging markets. Longer term, national champions will aspire to solidify their positions in the region - and evolve towards becoming regional champions. This will only happen through M&A. The question is how fast the regional market will consolidate around a limited number of these regional champions.”

Hadi Badri, Manager – Middle East, Bain & Company said, “Recent acquirers will need to be creative about how they extract synergies from their recent acquisitions, before they return to the negotiation table for more. When they do return however, their experience will mean that they will be best positioned to generate incremental value from their next acquisitions. As the Bain findings indicate, successful acquirers will be those that make external growth an integral part of their strategy agenda and pursue M&A systematically.”

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