The latest readout of our ongoing Global 2,000 research shows that a large-deal approach to M&A holds more risk than other types of M&A programs—second only to an organic approach, in which a company pursues no M&A. According to the data, the chances that a company using the large-deal approach1 will outperform industry peers (as measured by total shareholder returns) is 50-50—akin to a coin flip2 (Exhibit 1). But there are ways companies can change those odds, particularly when they understand which approaches to M&A really work.
Our research and experience in the field point to four actions that the outperformers (across all sectors) have taken to increase the chances of success in large deals: they pair a large-deal approach to M&A with a programmatic one, they consider healthy corporate culture a source of competitive advantage, they focus on revenue growth, and they continually reset cost baselines to perform better than competitors.
Adopting a philosophy of deal making closer to that of the outperformers is not for the faint of heart. It can be challenging and will require dedicated time and attention from senior management. But even taking small steps in this direction is worth it: by reconsidering how they pursue M&A, companies can build rigor into their deal-vetting and due-diligence processes and capture benefits beyond just the synergies themselves—for instance, a healthy culture that can quickly spot and seize new business opportunities and sources of value.
Pair a large-deal approach to M&A with a programmatic one
Companies that augment their pursuit of large deals with a programmatic approach to M&A generate 1 percent more annually in TSR (on average) than their peers do and are generally more successful in those deals (Exhibit 2). And, as we observed, they do not allow pursuit of large deals to stop momentum on their programmatic M&A activities. (As a reminder, programmatic M&A is when companies pursue multiple small or medium-size acquisitions as part of their growth strategy.)
A global advanced industries company took just such a dual approach to M&A. About ten years ago, it completed a large acquisition to diversify its product portfolio and enhance its R&D capabilities. Over the next few years, the company also pursued a series of smaller deals, with the idea of bolstering its existing product lines and improving services to existing clients. It intentionally and quickly spun off parts of the acquired businesses that were not considered core; it communicated its plan to do so to investors and other critical stakeholders as deals were announced.
Several years on from the original big deal, senior management was considering ways to enter new markets and reduce the company’s reliance on its existing market segments. The advanced industries player completed another large deal and quickly divested itself of assets that weren’t core to its growth objective.
All along, the company followed a consistent approach of focusing on costs and ensuring lean operations. That consistency has paid off: over the past decade or so, the company has achieved excess TSR of more than 20 percent (up from about 8 percent previously). As this example suggests, companies can mitigate the risks that large deals inevitably bring by staying active in the deal market (through smaller deals) and focusing on execution.
Consider healthy corporate culture a source of competitive advantage
The cultural health of the acquirer is a big determinant of post-close success in large deals. In fact, the acquirers in our Global 2,000 survey with a “healthy” culture—defined as one that demonstrates strong talent management, external communications, and internal operations—performed better financially than peers.3 The healthy acquirers gained, on average, 5 percent in excess TSR two years after deal close, as compared with peers. Meanwhile, the change in TSR among “unhealthy” companies was –17 percent over the same period (Exhibit 3).
In large deals that involve a clear cultural mismatch, top talent on both sides may bolt for other opportunities, the base business may suffer, and the acquirer may take longer to reap value from the deal—if synergies are achieved at all. It’s critical, then, for potential acquirers to take time at the outset to measure both their own organizational health and that of the target company. It may sound like a simple step, but in our experience very few companies systematically consider cultural fit and capabilities before they do a deal.
What do healthy acquirers do differently? For one thing, they ask themselves critical questions about how they select and manage talent. In one merger of two technology companies, the integration team closely tracked the balance of candidates assigned from both companies to specific areas of the combined entity. If any area was not achieving appropriate balance, team leaders intervened.
For another thing, healthy acquirers put a premium on understanding and protecting the combined value proposition from the deal and communicating it to all stakeholders. One acquirer rigorously tracked sales volumes from the moment the deal was announced, and if there was any decline in the numbers, sales leaders were alerted.
Acquirers with healthy cultures also assess whether they have the internal discipline to successfully integrate a target. Most implement a standardized approach to deal screening, define clear metrics to be used during due-diligence phases, and build detailed plans, before the deal is closed, for managing contracts, customers, and commitments.
Focus on revenue growth
The outperformers in our research created most of the value from large deals through increased revenues.4 Indeed, when we segmented the “large deal” companies in our Global 2,000 research base into top- and bottom-half performers, we saw marked differences between these cohorts’ top-line growth and contributions to shareholder return. The top-half performers used large deals to grow revenues but also saw improved margins, multiples, and dividend changes. The bottom-half companies saw no sales growth, despite their large acquisitions, and saw their margins and multiples deteriorate (Exhibit 4).
There are a range of reasons for the gap between top- and bottom-half performers. One key factor, however, is management attention. Large deals are huge internal events, and integrations require a strong base of business momentum to avoid disruption. Senior leaders will necessarily be focused on quickly capturing cost synergies, but if they are not simultaneously monitoring revenues and growth opportunities, they may overlook sources of synergy—and destroy value.
To avoid this pitfall, some successful acquirers have set clear integration milestones and have established scorecards to track progress against them. Many have formalized their dialogues about revenue synergies and transformational opportunities—for instance, carving out time in critical performance-management meetings to have these conversations. Cost synergies can help pay for big deals, but revenues are the critical differentiator.
Of course, a focus on revenues must be balanced out by another factor for large-deal success: a continual reset on costs.
Continually reset cost baselines to perform better than competitors
The largest difference between the top- and bottom-half acquirers in our data set is the margins. Top performers continually reset their cost baselines to get ahead of the competition; they created value by increasing the scale of the business and improved margins by more than 1 percent. They tended to choose only one or two transformational deals and accepted no excuses for rapid cost takeout. By contrast, bottom-half performers couldn’t keep integration costs under control and lost value for their companies, with margins of –3.4 percent. The lesson here? Companies that are pursuing large deals need to proactively manage their costs—not just to create value but also to avoid downside risks.
Success with large deals may be considered a coin flip—but as our experience in the field shows, acquirers can improve the odds by pursuing such transactions systematically and with a sense of purpose. By doing so, executives can create more shareholder value, certainly, but they can also improve organizational health and culture, build up their M&A capabilities, and shore up the top and bottom lines in their companies.