The FINANCIAL — While more than half of all corporate acquisitions destroy value, companies that are frequent acquirers far outperform both one-time acquirers and nonacquirers in creating value for their shareholders, according to a new report by The Boston Consulting Group (BCG). Experienced acquirers also grow significantly faster—on both the top and bottom lines—than companies that rely only on organic growth. BCG’s 2015 M&A report, titled From Buying Growth to Building Value: Increasing Returns with M&A, is being released on October 12.
In connection with its 2015 M&A report, BCG analyzed total shareholder returns (TSR) of some 19,000 companies in the firm’s M&A database. BCG compared the annual TSR for 5-year, 10-year, and 25-year periods for three types of companies: “one-timers” (companies that make only one acquisition in a five-year period), “active buyers” (two to five deals in a five-year period) and “portfolio builders” (more than five deals in five years).
“Active buyers and portfolio builders achieved annual TSR rates substantially higher than those attained by one-timers and also much higher than companies pursuing only organic growth,” said Jens Kengelbach, a BCG partner, global head of M&A at BCG, and a coauthor of the report. “Over the 25 years from 1990 through 2014, for example, portfolio builders and active buyers realized an average annual TSR of 11.6 percent and 8.8 percent, respectively, while the average annual TSR of one-timers and nonacquirers was 3.5 percent and 5.6 percent, respectively. Comparisons yielded similar results over ten- and five-year time frames.”
Because so many deals involve one-time acquirers, these transactions drag down the overall averages. In the 25-year period assessed, the typical deal generated a relative TSR of only 4 percent for the first year after the announcement date, and only 47 percent of all deals performed above this mark. One-timers saw an average relative TSR of only 2 percent, and just 43 percent of such deals produced a positive shareholder return. Active buyers and portfolio builders realized an average one-year relative TSR of 6 percent and 8 percent, respectively, and more than half of the deals that involved these acquirers created positive returns for their shareholders.
“Two big differentiators for successful acquisitions are selectivity and effective postmerger integration,” said Georg Keienburg, a BCG principal and a coauthor of the report. “The average acquirer reviews roughly 20 candidates before closing a deal. At the same time, for the vast majority of companies, acquisitions are infrequent events, and PMI is one of the most difficult challenges that senior executives face. In most organizations, PMI is not a core skill, and inexperienced management teams often find that they overestimated their preparedness or underestimated the challenges.”
BCG’s research also found that acquisitive companies have higher EBITDA growth rates. Over the same 25-year time frame, nonacquisitive companies increased EBITDA at the same rate as they increased sales—an average of 9 percent. Acquirers increased EBITDA faster—an average of 15 percent—and, once again, the more companies they acquired, the faster the absolute earnings increased (up to 22 percent for companies that made more than five acquisitions in a five-year period). But for acquirers, growth in EBITDA was, on average, slower than growth in sales —by 1 to 3 percentage points (again, depending on the number of acquisitions made.)
“Acquisitions are good for growth and good for value, but only if you are good at acquisitions,” said Kengelbach, who is also the global leader of the BCG Transaction Center. “The data show that acquisitions tend to be margin dilutive, so the more experienced the acquirer, the better its chances of overcoming the margin challenge. The challenges companies face are not necessarily proportional to the size of the transaction. Many acquisitions fail to realize their potential—and plenty just flat out fail—even in high-growth markets because of unsuccessful PMI.”