Multiple small mergers and acquisitions over several years creates greater value for firms than episodic major transactions, a decade-long study revealed.
Companies that followed this programmatic M&A strategy over a more than ten-year period “generally outperformed peers”, management consulting firm McKinsey & Company found.
In a study of 1,000 global firms (Global 1,000), “programmatic acquirers” that pursued many small deals that accrue a meaningful amount of market capitalisation over many years achieved “higher excess total shareholder returns” than industry peers that favoured large deals, selective acquisitions, or organic growth.
Indeed, alternative approaches were found to have underdelivered, and in cases where firms favoured selective acquisition and organic growth, more than a quarter had fallen out of the Global 1,000 by the end of the study due to takeovers and other factors, thus reenforcing the “importance of placing multiple bets and being nimble with capital”.
“The more deals a company did, the higher the probability that it would earn excess returns,” said McKinsey,
Further, when comparing these groups, programmatic acquirers tended always to establish organisational infrastructures and best practices across all stages of the M&A process—from strategy and sourcing to due diligence and integration planning to establishing the operating model.
“The programmatic model may not be the right fit for every company, of course,” McKinsey caveats. “Some businesses may contend with organisational limitations or industry specific obstacles (consolidation trends and regulatory concerns, for instance).”
Strategy and sourcing – first principles
An effective M&A blueprint sets the limitations of pursuing certain deals and gives a realistic view of market trends. E.g:
- Which market-shaping forces are most promising in our sector?
- How are competitors likely to evolve?
- What are our sources of competitive advantage?
- What capabilities are we trying to acquire?
- Are assets readily available, or are they overpriced?
- Do we have the relationships required to carry out this transaction?
- Are regulatory constraints too much to overcome?
Due diligence and integration planning
Programmatic acquirers in the study favoured tackling both aspects simultaneously, holding advanced discussions about redefining roles, combining processes, and adopting tech. Mutual corporate culture and organisational health also proved important.
Operating model – the devil is in the detail
Be systematic. Build end-to-end M&A operating models with clear performance measures, incentives, and governance processes. The criteria by which potential acquisitions are evaluated “are clearly defined and made transparent” to all stakeholders.
“A programmatic approach won’t work if you don’t define the program and don’t treat M&A as an enduring capability rather than a project or occasional event,” said McKinsey.
RSK Group is a good example of a company employing the broad principles of McKinsey’s strategy, acquiring eleven very different companies with varying services and capabilities since January. CEO Alan Ryder said he wants to run the largest provider of “sustainable solutions” in the world, relying on the “cross-fertilisation of ideas and expertise”.
Utilities and energy company OCU Group has also been rapidly expanding its operation via multiple small-to-medium-size acquisitions, recently achieving its sixth in just over 12 months.
Interested in construction M&A? Try The rapid expansion of RSK Group continues – or how about OCU expansion continues with ‘largest acquisition to date’
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