ESSENTIALS FOR LEADERS AND THOSE THEY LEAD

Mergers and acquisitions, when executed well, are one of the most critical tools companies can use to create value. But they’re not always the most popular path to growth. This was certainly true in 2023, a tough year for M&A by many measures. Yet hope springs eternal, thanks to a late-in-the-year rebound in deal activity and continued confirmation that programmatic acquirers (companies that pursue multiple small or midsize acquisitions every year) outperform their competition. This week, we look at the reasons why M&A might matter now more than ever and the ways that companies can prepare for their next deal.

AN IDEA

M&A is not dead

It’s been a volatile few years for the M&A market, which was in a bona fide slump in 2023. While the S&P 500 rose by 24 percent, global deal value and volume were both lower than in the pandemic year of 2020. Despite the glum statistics, McKinsey senior partners Jake Henry and Mieke Van Oostende are optimistic about M&A’s prospects. In their 2024 M&A activity report, they predict a growing appetite for deals due to a few factors: amid major changes in the business environment, M&A is strategically essential to competitiveness; macroeconomic concerns, such as inflation, are tempering; and many investors have a healthy amount of cash on hand. While the M&A opportunity varies by industry and region, the report points to steps that all companies can take to prepare for a potential groundswell of transactions. Among them: reevaluating the company’s M&A themes and strategies (divestitures included) that are most relevant to the business, investing in the capabilities and assets that will support future portfolio changes, and pursuing partnerships and alternative deal types, such as joint ventures, to mitigate potential risks and financing issues.

A BIG NUMBER

$8.3 trillion

That’s how much money the world’s 2,000 largest companies (or the “Global 2000”) spent on deals in the past decade. With the right M&A blueprint and capabilities, the payoff from transactions can be huge. Yet even with so much value at stake, McKinsey’s Ignacio Fantaguzzi and Christopher Handscomb say that one important M&A capability, culture, is often overlooked. “Differences in cultures can exist at any level and can seriously disrupt operations and jeopardize integration,” they say. “Companies may differ in their cultures around decision making—one may have a top-down, directive culture while the other’s is consultative and process-driven.” To practice effective culture management, it’s important for organizations to recognize the differences in how work gets done, decide on a future culture for the integrated company, and develop a change story that will inspire the new culture (and related behavioral changes) to take root.

A QUOTE

“It’s critical for potential acquirers to take time at the outset to measure both their own organizational health and that of the target company.”

That’s McKinsey’s Jeff Rudnicki and colleagues on the virtues of a “healthy” corporate culture in large M&A deals, or transactions in which the deal is worth at least 30 percent of the acquirer’s market capitalization. While the odds for success in large deals are essentially a coin toss, Rudnicki and coauthors explain that a few traits of organizationally healthy acquirers help give these companies a competitive edge: they are rigorous in their selection and management of talent, focused on the deal’s value proposition (and actively communicate that to stakeholders), and disciplined in their process of integrating a target.

A SPOTLIGHT INTERVIEW

Long-running McKinsey research continues to demonstrate the value of a programmatic approach to M&A, in which dealmaking is treated as a continuous process, rather than an event, that requires a robust set of capabilities. Not only does a programmatic M&A strategy yield consistently better returns than all other approaches to transactions, but it can also be instrumental in boosting a company’s resilience. “To develop that muscle, you need to think about M&A holistically, starting with a link to strategy,” says McKinsey’s Patrick McCurdy in a recent episode of the Inside the Strategy Room podcast with Tobias Lundberg, Jeff Rudnicki, and Joanna Stone Herman, a partner at M&A advisory firm Oaklins DeSilva & Phillips. McCurdy and colleagues also identify what they call “the three Cs”—competitive advantage, conviction, and capacity—which can enable programmatic acquirers to continue pursuing deals, and finding success, even through a downturn.

– Edited by Daniella Seiler, executive editor, Washington, DC

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