Interest rates be damned: mergers and acquisitions are back in vogue as executives chase shareholder value. But while the logic of buying growth seems simple, most deals destroy value instead of creating it.

While the M&A markets have slowed since the Federal Reserve raised interest rates in 2022, the last year has been buzzing with announcements of major corporate deals. In an effort to manage flat — or, in many cases, downward-trending — stock performance, companies are looking to strategic transactions to boost shareholder returns, acquisitions being chief among them. 

The logic of acquisitions makes sense, in theory: the market share of two companies combined is greater than that of one company by itself. Additionally, when partnered with the potential cost synergies that can be captured by driving operational efficiencies across the merged companies, acquisitions seem like a great way to boost returns. After all, where would Google be without YouTube, or Facebook without Instagram? Huge acquisitions transformed how these companies reached new customers. The issue is that these acquisitions are not the norm; they're exceptions to the rule. Acquisitions don't work for most businesses — at least not in the way their leadership hopes. 

Between 70% and 75% of acquisitions fall short, often because buyers overestimate what they're getting and fail to deliver the anticipated synergies. While there may be an initial boost in stock prices, after a few months, most companies are performing on par with where they were before announcing the acquisition, if not a few points lower. At the cost of millions of dollars in diligence and legal fees, companies learn the hard way that they are not the exception to the rule and that acquisitions are not a silver bullet to achieving growth. 

Yet companies continue to pursue the path of acquisition. Why? 

One reason is the environment that executives deal with today pushes them towards this sort of big-swinging effort. For example, the shift to stock-based compensation packages means executives are being rewarded based on hitting specific share price, shareholder return or quarterly earnings metrics.

Meanwhile, the average tenure of CEOs has shortened dramatically over the last decade, with the average CEO serving just over four years. And activist investors are increasing their activity, with involvement reaching a six-year high in 2024. 

With these factors at play, CEOs are entering their C-suites with a limited time to prove their impact, greater external pressures, and the promise of a bigger payday if they can boost the company's stock price within that timeframe. 

In this context, a transaction can appear to make sense. Why take the time trying to hit a single or a double, when you might get pulled from the game before you can score? Just swing for the fences. 

It's almost cyclical at this point: a company pursues a merger, the merger fails, and the company is left scrambling to come up with alternate methods to satisfy a now upset market. The company starts buying back stock, announces a restructuring, or cuts back to core competencies — all strategies they could have just pursued in the first place if they had been more precise in coming up with market strategies. 

We have seen this play out with a number of companies in recent years. An oilfield service company with a 1.2% shareholder return rate landed at a 0.48% shareholder return rate after a failed merger, despite efforts to pivot and focus on improvements to operational execution. And a diversified industrial and technology company sells a recently acquired business unit after costs and compliance become unmanageable, then reinvests into core growth.

Mergers are incredibly costly ways for companies to end up right back where they started, which is why companies need to disabuse themselves of this notion that buying growth is more effective than delivering profits. 

Companies seeking to boost shareholder returns can benefit by focusing on long-term, sustained growth through emphasis on core business competencies first. 

Start by identifying what your core business markets are and what adjacencies exist within the portfolio. Work your way through the portfolio by targeting lower margin businesses and understanding where overall margin performance can be improved. Relentlessly focus on the customer journey and understand their buying decisions to optimize the company’s go-to-market approach.  And if an immediate boost is necessary, look towards alternatives like stock buybacks. 

While executives have their fair share of work to do to refocus on delivering profits, boards have a role to play as well. If they want to avoid every new CEO pitching the same tired ideas to boost short-term stock performance, they need to stop rewarding CEOs with short-term stock incentives and instead align incentives with the company's overall health. 

Growth through acquisition may look good on paper and even benefit some in the short-term. But long-term success of a corporation and the rate of return to its shareholders starts with a close look at the core competencies that drive a healthy bottom line — something that both executives and boards have to be involved in. The pressures of the market push companies to look for quick wins, but focusing on sustained growth within their existing portfolios is what will really make businesses successful.