Over 300 billion dollars of value evaporated between the moment the AOL Time Warner merger was announced in January 2000 and December 2009, when merger and acquisitions failed against whatever criteria of success was used by the acquiring company, when the transaction was made. Yet, at the same time, the number of deals averages over 23,000 transactions per year between 1995 and 2009. This is 3.5 times more deals than the yearly average between 1980 and 1994 and 7 times more deals than the fifteen years span between 1965 and 1979.spun off and started to trade as its own public company again. While this transaction is certainly an extreme case when measured in terms of value destroyed, a significant number of studies find that over 50% of the
In terms of value, the average transaction value reached $110 million in 2006, equating to a 15% compound annual growth rate for the period 1981 to 2006. By all means a remarkable increase. Many well known and well run global giants would not be where they are today, without as an important engine for growth. This may seem a paradox. Why would more and more organizations want to go a difficult, high risk path that, on average, produces less than 50% of chances of winning?
Well there may be very good reasons. First, as pointed out in a BCG study (1), “headline averages are both specious and misleading. M&A can destroy value, but it can also create very substantial value”. Second and more importantly, aggressive deal making just reflects the increasingly shared belief that corporate partnering programs are clearly superior over organic growth strategies. Indeed, the competition for market share and the resulting shrinking of profit margins reduce the number of opportunities for high rates of return with organic business growth. Furthermore, organizations that sit on the sidelines and don’t participate in the M&A market often see their rivals acquire key targets for faster growth, better competitive positioning and higher returns. And they only sit so long until they become the target.
Therefore, the main challenge for management is to understand how to increase the odds and become successful in executing their M&A strategy. And some really seem to have figured it out since, as another BCG study (2) highlighted “highly acquisitive companies generate 29 percent higher returns over ten years”.
M&A execution, from target sourcing to target integration is a corporate skill that has to be acquired, improved through practice, and ultimately, institutionalized. It comes with costs, but one should rather look at those as an investment that will provide an organization with the ability to consistently beat the odds and deliver value through well executed M&A and, over the long term, achieve significantly higher shareholder returns than less prepared competitors.
We invite your comments and observations on this topic.
(1) The Brave New World of M&A: How to Create Value from Mergers and Acquisitions, The Boston Consulting Group, July 2007
(2) “Successful M&A: The Method in the Madness” Opportunities for Action in Corporate Development, The Boston Consulting Group, December 2005