- Companies across a broad range of industries yield the greatest deal-making returns for shareholders by systematically and regularly acquiring companies rather than by making a “big bang” acquisition or by growing “organically” without mergers and acquisitions, according to research by McKinsey.
- “Carefully choreographing a series of deals around a specific business case or M&A theme — rather than relying on episodic 'big bang' transactions — is far more likely than other approaches to lead to stronger performance and less risk,” McKinsey said. “Companies that regularly and systemically pursue moderate-size M&A opportunities deliver better shareholder returns than companies that do not.”
- Companies that follow “programmatic” M&A enjoy a 65% chance of outperforming their peers, whereas those that buy a company with a market capitalization that is greater than or equal to 30% of their own market capitalization have just an even chance of success.
Deal-making is surging this year as the economy rebounds from a pandemic-induced recession, record monetary and fiscal stimulus pumps up liquidity and many companies struggle to recover from months of lockdowns and supply chain disruptions.
The value of M&A activity involving U.S. target companies hit a record $1.3 trillion during the first half of 2021, increasing 249% compared with the first six months of last year, according to Refinitiv. U.S. deals accounted for 47% of the $2.8 trillion in worldwide M&A during the period.
The Federal Trade Commission (FTC) received 2,067 merger filings from January through July, an “astounding” 138% jump compared with the same period last year, FTC Bureau of Competition Director Holly Vedova said in August.
“Activity is surging as companies use M&A to manage the still-unpredictable economic effects of the COVID-19 pandemic and find their strategic footing,” McKinsey said. “They are pursuing deals to streamline their assets, establish or extend their digital capabilities, acquire top talent and otherwise strengthen their competitive positions.”
Companies that take a programmatic approach to M&A annually delivered on average about 2% more in excess total returns to shareholders (TRS) compared with their peers, McKinsey said. The worst M&A strategy is no M&A at all — companies that relied on their own resources to expand capacity lagged their peers the most.
“Programmatic M&A is not purely a volume play; it’s a strategy for systematically building new businesses, services, and capabilities,” McKinsey said. “The companies that use a programmatic approach create deal flows linked to their conviction in their corporate strategy, understanding of their competitive advantage and confidence in their capacity to execute.”
A medical-device company illustrates the value of programmatic M&A, McKinsey said. From 2000 until 2009 it completed on average one acquisition per year and generated minus 1.5% TRS.
After a leadership change, the company in 2010 pursued a programmatic deal-making approach and expanded its geographic reach by completing six acquisitions every year. The company pushed up its average annual TRS during the following decade to 2.7%, McKinsey said.
Companies that take a programmatic M&A approach retain an edge during times of economic turmoil, McKinsey said. “Even during the COVID-19 pandemic, programmatic acquirers’ performance far outpaced that of their peers using other approaches to M&A, which is consistent with what we’ve seen in prior downturns.”
Still, the programmatic strategy may not fit for every company, McKinsey said. “Some businesses may have to contend with organizational limitations or industry-specific obstacles.”