Growth Through Acquisitions

Despite recent improved economic conditions many companies are still struggling to reach their growth aspirations organically. In the past, they might have considered selective acquisitions as a means of growth.  Today, however, many executive view mergers and acquisitions (M&A) with skepticism.  They have seen articles that suggest that at least half of all acquisitions fail to create value for the acquirer's  shareholders.  And, obviously, they are wary of the excesses of the late-1990s when too many companies used acquisitions as a quick but ultimately unsustainable method of boosting market share and multiples.

This skepticism is unwarranted.  Recent research suggests that acquisition-led strategies can be value-creating in any industry, and are essential in some. Why the confusion?  There are many reasons why and why not to pursue an acquisition based strategy. 

In our experience, the best acquirers design acquisitive growth programs that are explicitly driven by strategy, and that continuously screen chosen markets for opportunities that will deliver their strategies at a faster and more valuable rate than organic growth alone. They have the discipline to walk away from deals they cannot comfortably create value from; and they have the skills to maximize the value of the deals they do make. They do so by conserving the value of both base businesses, capturing the value of the synergies behind the acquisition case and creating new value through coherent strategic and organizational integration that ensures a "merger of minds" on the top management team. 

The Boston Consulting Group recently issued a report which analyzed over 700 public companies over a ten year period, separating them into groups based upon their acquisition strategies (Please contact us if you would like the full report).  Below are their findings that confirm our experiences:

• The highly acquisitive companies had the highest total shareholder return.  This performance translated into a 29% higher return over the full ten year study.
• Although some individual companies have generated extraordinary shareholder value through organic growth alone, on average, the most successful acquisitive growers also outperformed the most successful organic growers.
• This superior growth was not due to higher profitability but rather to the acquisitive growth itself.  The fastest growing acquisitive companies in the sample had only average profitability, while carrying higher levels of debt and delivering below-average dividends, all signs that investors are rewarding them for the value created by the acquisitions themselves.
• Finally, the study also confirmed some basic concepts of value management.  The most successful companies did not try to grow out their problems by pursing growth returns below their cost of capital.  Rather, they made sure they were delivering cash flow returns on investments for each transaction. 

History makes it clear that there is no inherent disadvantage to pursuing growth through acquisition.  On the contrary, under the right circumstances it can be the best way to generate value-creating growth.  But that doesn't necessarily mean that companies should pursue it under any circumstances.  Acquisitive growth only makes sense when executives can create a sustainable competitive advantage.  One requirement is professional M&A implementation skills.  But success is first and foremost a question of strategy.