A Better Approach to Mergers and Acquisitions

Summary:

Twenty years ago, consultants at Bain & Company published a book that explored a dispiriting reality: Although companies spent billions of dollars a year pursuing deals, 70% of mergers and acquisitions wound up as failures. According to new research by Bain, over the past 20 years firms have done more than 660,000 acquisitions, worth a total of $56 trillion, with deals reaching a peak in 2021. And close to 70% of them have succeeded. Even among the roughly 30% that were less successful, many of the deals still created some value. What has changed? This article presents four explanations for the turnabout.

Twenty years ago, consultants at Bain & Company published a book that explored a dispiriting reality: Although companies spent billions of dollars a year pursuing deals, 70% of mergers and acquisitions wound up as failures. The book, Mastering the Merger, was released in the wake of a series of corporate marriages that ended badly, including AOL and Time Warner, Daimler and Chrysler, and Citicorp and Travelers. This wasn’t a new phenomenon. Academic studies dating back to the 1970s had concluded that most acquisitions don’t play out the way the investment bankers promise. Even among deals that appeared profitable from investors’ perspective, Bain’s surveys of executives showed that many fell short of the internal projections made to justify the purchase.

Recently one of the book’s authors, David Harding, and two Bain colleagues decided to take a fresh look at the M&A landscape. What they found surprised them. Over the past 20 years, firms have done more than 660,000 acquisitions, worth a total of $56 trillion, with deals reaching a peak in 2021. But the odds of failure have inverted: Today, close to 70% of mergers succeed. Even among the roughly 30% that were less successful, many of the deals still created some value.

What has changed? Bain’s deep dive into that question led to four explanations for the turnabout:

Acquiring companies use M&A to pursue a broader range of strategies. In the 1990s and early 2000s, most acquirers were targeting competitors or companies in similar industries, looking to increase scale, lower costs, and gain on rivals. Over the past 20 years, however, companies have taken a broader approach to M&A. They are pursuing deals to develop toeholds in emerging industries or geographies, to make their supply chains more efficient, to take advantage of geopolitical opportunities, to gain new capabilities in areas such as artificial intelligence, and even to find new sources of talent. Often, the strategic rationale focuses on growth opportunities, meaning that companies aren’t as reliant on grinding out cost savings, which in the past often proved harder to achieve than predicted.

Acquirers are more sophisticated about due diligence. In the past, most of the due diligence for mergers was conducted on spreadsheets, with a focus on whether the financials made sense. More recently, companies have expanded the types of investigations they conduct before signing a deal. They make cultural assessments to determine how well the people working in the target company will adapt to the norms and values of the acquirer. Formal talent assessments allow acquirers to take a harder look at the capabilities of the people running the target company—and make smarter projections about their ability to make postmerger integration a success. Social media gives acquirers easy access to feedback and commentary from target companies’ customers, employees, and former employees. Today, the researchers write, “the best acquirers quickly make themselves authorities on the businesses they are pursuing.”

Acquiring companies gain experience and expertise by doing more deals. It’s no secret that the more often you do something, the more skilled you become. Over the past two decades, companies have done fewer megadeals and have instead pursued more-frequent and more-modest transactions. That has helped companies get better at the various facets of M&A, including estimating synergies before the deal closes and achieving them during integration. And when a company is doing deals frequently enough, it can justify having a full-time team of specialists who do nothing other than identify targets, negotiate terms, and conduct due diligence. Over time, that specialization can pay off.

“If you’re only doing deals episodically…there simply isn’t a platform to have a dedicated team,” says Dale Stafford, a leader in Bain’s mergers and acquisitions practice. In the past, companies would often pull a disparate group of relatively inexperienced people away from their regular jobs to do due diligence or work on postmerger integration. The advantages of having full-time specialists are obvious. “It’s a bit of a volume game: Doing more deals means that you can have dedicated M&A people who acquire more and more experience over time,” Stafford says.

Consider the larger Silicon Valley companies. “Some of the tech companies were doing almost a deal a week at the peak,” says Suzanne Kumar, a vice president in Bain’s M&A practice. “They have fully built-out teams, with different people for due diligence and integration.” And the trend extends beyond Silicon Valley. Bain points to Thermo Fisher Scientific and beverage distributor Constellation Brands as examples of firms that have built substantial teams focused on M&A—and given the people leading them a seat at the senior leadership table.

Acquiring companies are better at integration. Integrating two companies is a giant undertaking. Fortunately, the techniques, tools, and technology used to manage large projects have advanced significantly in the past 20 years. (For example, the agile methodology was invented only four years prior to the publication of Mastering the Merger.) Additionally, as organizations gain experience by making acquisitions more frequently, they learn what integration tasks they need to prioritize, what areas are likely to be troublesome, and how to make key decisions more efficiently. “We cringe a little when we reread our integration advice from 20 years ago,” the researchers write, because the field has advanced so much since then.

The overall increase in M&A has been rewarded by investors. Twenty years ago, even though the majority of acquisitions were unsuccessful, the researchers found, companies that made frequent deals showed higher shareholder returns—a sign that investors preferred companies that were willing to take these risks. Since then, this phenomenon has increased. Companies that are frequent acquirers (doing at least one acquisition a year) earn double the returns earned by companies that rarely or never do deals.

Moving from a 70% M&A failure rate to a 70% success rate over 20 years is significant, but as the deals continue, an important question has arisen: Has the success rate reached a plateau, or is there potential for the gains to keep increasing?

“The vast majority of companies are not frequent acquirers, so they are just starting on this journey and haven’t really created that repeatable model yet,” Kumar says. For that reason, the researchers are hopeful that the success rate can increase even further.

About the research: “How Companies Got So Good at M&A,” (Bain white paper, by David Harding, Dale Stafford, and Suzanne Kumar)

“We’re Not Looking at Fixer-Uppers”

Chris Koch has been CEO of Carlisle Companies, an Arizona-based building-products company, since 2016. Carlisle has acquired 24 companies in deals totaling $3.5 billion since he took the helm—a continuation of its long-standing growth-by-M&A strategy. Koch spoke to HBR about rising M&A success rates. Edited excerpts of the conversation follow.

Looking back, do you recall learning that M&A is fraught with failure?

It’s something we were indoctrinated in as MBA students in the 1990s. I remember someone teaching us: “The first rule of acquisitions is that most fail. There are no good acquisitions.” I’ve learned that depends partly on how you define failure. Some acquisitions may look successful because they increased earnings, but they failed to meet the internal projections used to justify the deal. In those cases, you would probably have been better off allocating that capital elsewhere.

Has the way you do M&A changed?

Years ago, we had a very small corporate staff, so our M&A process was decentralized, and most of the ideas for acquisitions and due diligence came out of the operating divisions. Today due diligence is handled by a larger team at corporate, and it’s much more thorough. We have become much more process oriented, as opposed to approaching each acquisition as a one-off. We also have clearer principles for the kinds of companies we’ll acquire and the kinds we won’t.

What type of companies do you look for?

First, we look for companies that have organic growth opportunities on a stand-alone basis. We’re not looking at fixer-uppers. We bring in third-party researchers and consultants to do additional investigative work into the economics of the business. Second, we look for hard synergies—raw material savings, factory consolidation opportunities, reduced corporate costs. We want to see substantial savings if we bring the companies together, and we really dig into that during due diligence. Third, we create a detailed integration playbook with dates, milestones, and goals. Investors expect to see results from an acquisition immediately, so it’s important to demonstrate progress quickly. We also look more deeply at the human element—the people at the target company. We used to assess the leaders on whether they could run their own business. Now we look at whether they can be leveraged across our organization and become a bigger part of Carlisle.

Can you describe an acquisition that you rejected because of what you found during due diligence?

We were going to acquire a company in Europe and went right up to the eleventh hour with it. Part of the rationale for the deal was cost savings from factory improvement—something that is fairly straightforward to achieve in the United States. We sent people from our corporate leadership team to Europe to do on-site due diligence, and the more we looked at it, the more we realized that local regulations and labor practices would make those savings hard to achieve. When you added in that risk, the return went down, and it didn’t get over the hurdle.

Does the industry the acquisition is in matter?

We’ve found that the closer the acquisition is to your core, the better you understand the business and the potential synergies. That helps de-risk the deal. The further you get from your core, the more uncertainties there are and the greater the risk. That’s why we do a lot of smaller, bolt-on acquisitions that open up a new channel, a new geographic area, or access to a new technology.

As a CEO, how much time do you personally spend on M&A?

A significant amount. I’m looking at deal flow. I’m deeply involved in evaluating the deal model for proposed acquisitions. I ensure that resources are available for due diligence. It’s a substantial part of my job because M&A is an important part of our strategy.

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