Secrets of the M&A Masters

Revealing the paths to a successful deal.

The numbers do not inspire confidence.

Over and over, studies of mergers and acquisitions show that deals fail to create shareholder value. One recent survey says that more than 70 percent of acquisitions fail; another, 61 percent.

A third study reports that 89 percent of acquired businesses actually lose market share. True, some observers have suggested that given enough time, the success rate of acquisitions rises.

And some argue that mergers do succeed if measured against the proper yardstick. But while there is debate about the payback, no one would deny that acquisitions are fraught with risk.

Fifty years ago, businesses typically pursued organic growth, and mergers were fairly rare, according to Richard L. Nolan, professor emeritus at Harvard Business School. Today, mergers seem to have eclipsed organic growth as the business expansion vehicle of choice. For a variety of reasons, companies need to buy other companies — to gain market share, to enter new markets, to acquire technologies, to integrate vertically, and so on.

“There are a lot of businesses where growing organically is not enough to meet market expectations,” says David Harding, a partner at consulting firm Bain & Co. and co-author (with Sam Rovit) of Mastering the Merger. Thus, many finance chiefs will find themselves one day confronting the daunting odds of making a successful acquisition.

How can they improve their chances? One way, as evidenced by a number of recent articles and books, is to study and learn from other companies’ merger mistakes — which, unfortunately, are many and varied. Another way, presented here, is to focus on the key habits of frequent, successful acquirers. In the course of studying more than 1,700 companies, Harding and Rovit identified a pattern: companies that do a lot of small deals produce much better results, achieving nearly twice the excess shareholder return of intermittent buyers (calculated by subtracting the company’s cost of equity from total shareholder return). Frequent acquirers learn from each deal; the CFOs at these companies hone their acquisition skills, much like the professional buyers in the private-equity world do.

With a clearly defined acquisition strategy, strictly enforced target-selection criteria, and careful attention to both transaction mechanics and integration planning, these frequent acquirers have been able to generate above-average returns, while at the same time quietly folding dozens of new companies into their businesses. Such small transactions may not grab the headlines of a blockbuster deal like AOL-Time Warner or Hewlett-Packard-Compaq, but few CFOs are looking for such headlines. Instead, learning through experience, they seek to complement their organic growth with well-timed purchases.

From discussions with finance chiefs and business-development heads at six frequent acquirers — Dover, Wells Fargo, Charles River Laboratories, VF, Clear Channel Communications, and CRA International — we distilled the following advice. Their hard-won lessons can cut through the clutter of acquisition statistics and theory and serve as practical deal-making guidelines. Call them the secrets of the M&A masters.

1. Never Stop Shopping

The most critical factor of a successful deal is the most obvious one: finding a good target. “Very simply, you can’t make good stew unless you have good ingredients,” says Bob Tyre, vice president of corporate development at Dover Corp., a diversified manufacturing company with $5.5 billion in 2004 revenues that makes 10 to 20 acquisitions annually.


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