19 Nov Guess what: M&A is good for you!…?
Another report has been recently published from Intralinks and Cass Business School yet again telling us that actively acquisitive businesses perform better than those that don’t do M&A; you can download it here. As you can probably tell, I’m rather sceptical about such reports, especially when they come from groups with an interest in promoting mergers, acquisitions and divestments. While I’m not entirely convinced, this one does at least attempt to address a number of typical problems I find with such surveys, and does lead to some interesting questions:
- Is the M&A tail wagging the business performance dog? While their methodology remains slightly vague, their research does claim to tackle the biggest flaw I’ve seen in previous reports, that of confusing correlation with cause and effect: Does M&A help businesses perform better, or is it only healthier businesses that do M&A? Their conclusion speaks to a cycle of performance vs measured M&A activity – too many deals conducted by high-performing businesses leads to problems which ultimately slow or kill deal appetites. Their central suggestion is that it’s only a subsequent resumption of M&A that brings businesses back to health. This specific point is one I would challenge: In our experience poorly-performing businesses (and acquisitions for that matter) are due to deeper problems in governance, leadership and culture, not something typically improved by making an acquisition. While a step in the right direction, I remain unconvinced.
- …but only if you acquire all the time? Hmmm…The study also suggests that ‘the more you do it, the better you get’, almost regardless of age/maturity of the business; something that runs counter to some other studies we’ve seen, not to mention our own experience. Conversely, it could be a sign of businesses at last beginning to understand the need to learn and improve from one deal to the next rather than ‘re-invent the wheel’ each time? While not noted in the report, it is interesting to see that, according to the data, ‘young’ businesses – those publicly listed for no more than three years – are generally much poorer at M&A than their older brothers, only increasing their performance if they are ‘extremely active’ in M&A (2+ deals/year); any other level of M&A activity appears to destroy value. A lack of sustainable experience peeking through?
- Who’s best? Not raised in the report is what I consider to be the most interesting insight the data suggests: ‘Middle-aged’ companies (publicly listed for 3-10 years) appear to be much better serial acquirers than both their older and their younger peers. This differentiated performance only exists however when acquiring more than two businesses every year; at lower rates of M&A, performance improvements roughly track that of their older peers. Why would this group break away from the pack? But why, and so what? Other than restating the data from their own graphs, the report does little to shed light on the underlying reasons behind any of this. Certainly it would be unwise for firms to conclude that, if they have been listed for between 3 and 10 years, they should buy two companies every year to ensure shareholder returns! Knowing the complexity of factors that actually drive successful M&A – covering everything from leadership behaviours to experienced people to process and method – this report doesn’t provide answers, although it does pose some interesting questions. The ‘middle-aged’ serial acquisition success story is certainly worth further investigation: Perhaps this group tends to possess that ‘perfect mix’ of executive agility, experience and market expectation? It may be related to the types and relative size of deals done, or an internal Operating Model that helps disparate functions ‘connect the dots’ between pre- and post-close activities, and across the scope of integration.
- So what can we do to improve? I think the underlying trend here likely has to do with an organisation’s ability to learn and improve: Consider the graph, specifically the relative slopes of the three lines in question: the younger the company, the greater the impact that M&A frequency has on M&A success. The ‘young ones’ improve their business performance (market-normalised TSR CGR) by 1.7% points for every deal conducted within a 3-year period; for middle-aged’ firms, it drops to 1.1% points, while for the ‘oldies’, it drops further to 0.3% points – almost zero.
The take-away? Other factors are no doubt at play here, so allow me to cut to the chase: If you are new to the big league and conduct M&A relatively infrequently, accept that you may have special challenges learning from past mistakes, and therefore that there is a real risk of you getting it badly wrong, consistently. If you can institutionalise your approach, process and tools quickly, put the same people on the job from one deal to the next; and battle-test both with a steady flow of deals, then you may become able to significantly outperform your competitors. If instead you’re a larger, more ‘mature’ organisation looking to get something more than incremental competitive advantage from your M&A, doing more deals isn’t likely to improve your track record. Instead you may need to focus your attention elsewhere, very possibly at the culture and behaviours of your top team that may be keeping your M&A performance consistent, but low. (More on this subject can be downloaded here.)
The next M&A Integration Management Forum in March 2015 will be exploring the special challenges of serial M&A. For more details visit our events page or contact us.
I look forward to your comments.