The FINANCIAL — Companies that regularly acquire and divest businesses as part of their corporate strategy consistently outperform less active dealmakers in terms of shareholder return in the medium and long term, according to research published on August 30 in The Boston Consulting Group’s 2016 M&A Report, Masters of the Corporate Portfolio.
Over the 25 years from 1991 through 2015, the average annual shareholder return for companies that make at least five acquisitions or divestitures in a five–year period was 10.5% versus 5.3% for one-time dealmakers. Moreover, these “portfolio masters” achieve the higher return at substantially lower volatility—that is, they expose their shareholders to less risk because of better integration management when buying, and better preparation when selling, a business.
“Portfolio masters use active portfolio management via M&A to boost shareholder return,” said Jens Kengelbach, BCG’s global head of M&A and coauthor of the report. “These companies buy and sell in order to fine-tune, refocus, or diversify their portfolios. They understand that growth is the primary driver of TSR, almost regardless of whether growth is organic or inorganic. They estimate synergies and postmerger integration costs accurately, and they deliver on their projections. They create value.”
This new BCG report, which was prepared in cooperation with Paderborn University, compares three types of dealmakers—portfolio masters, “strategic shifters,” and “one-timers”—using BCG’s proprietary database of more than 54,000 M&A transactions since 1990. Portfolio masters represent only 6% of the companies in the sample (1,339 companies), yet they accounted for almost 14,000 deals, or about 25% of global M&A volume over the past 25 years.
Strategic shifters are companies that frequently rebalance their portfolios through M&A; they are involved in two to four transactions over a five-year period. One- timers made only one
“Investors like one-time dealmakers—at least in the short term,” said Georg Keienburg, a BCG principal and report coauthor. “Capital markets tend to buy into the story of a once-in-a-lifetime opportunity for acquirers. They are also appreciative when a company sheds a noncore asset that it may have held onto for too long. As a result, the initial capital market reaction in a narrow time window around the transaction is distinctly more positive (an average increase of 5.5%) for one-time dealmakers than for their more active counterparts.”
But one year after the deal announcement date, portfolio masters clearly outperform, as measured by relative total shareholder return (RTSR), a company’s total shareholder return compared with its sector index. Portfolio masters generate an average one-year RTSR post announcement of 4.1%—more than 1 percentage point higher than one-timers. Even more significant, portfolio masters generate their returns at significantly lower share-price volatility (36% standard deviation of RTSR as compared with 50% for one-timers), exposing investors to the lowest level of risk of all three types of dealmakers.
The research also shows that companies can increase their returns for shareholders by moving up the M&A ladder, from one-timer to strategic shifter or portfolio master. For example, the 37% of one-timers that moved up to strategic shifters generated a one-year RTSR of 4.5%. The 16% of strategic shifters that moved up to portfolio master status generated average one-year RTSR of 4.8%. By comparison, one-timers or strategic shifters that stayed in place or moved down the M&A ladder generally saw minimal or even negative RTSR as a consequence.
“For the typical CEO, M&A is a once-in-a-lifetime activity. But those that approach deal making as an industrial process create an advantage for their shareholders,” said Kengelbach, who also leads BCG’s Transaction Center.