Dive brief:

  • Companies across a wide range of industries generate the best returns on investment for shareholders by systematically and regularly acquiring companies rather than making a “big bang” acquisition or growing “organically” without mergers and acquisitions, according to the company. research by McKinsey.
  • “Carefully choreographing a series of deals around a specific business case or M&A theme – rather than relying on episodic ‘big bang’ deals – is much more likely than other approaches lead to better performance and less risk, ”McKinsey said. “Companies that regularly and systematically seek out moderate-sized M&A opportunities offer better returns for shareholders than companies that don’t. “
  • Firms that follow ‘programmatic’ M&A have a 65% chance of outperforming their peers, while those who buy a firm with a market cap of 30% or more of their own market cap have just an equal chance of success. .

Dive overview:

Dealings are on the rise this year as the economy rebounds from a pandemic-induced recession, record-breaking monetary and fiscal stimulus packages inflate liquidity, and many businesses struggle to recover from months of lockdowns and supply chain disruptions.

The value of M&A activity involving target U.S. companies hit a record $ 1.3 trillion in the first half of 2021, up 249% from the first six months of last year, according to Refinitiv. Transactions in the United States accounted for 47% of the $ 2.8 trillion of mergers and acquisitions worldwide during the period.

The Federal Trade Commission (FTC) has received 2,067 merger files January to July, an “astonishing” jump of 138% from the same period last year, Holly Vedova, director of the FTC’s Competition Bureau, said in August.

“Business is booming as companies use mergers and acquisitions to manage the still unpredictable economic effects of the COVID-19 pandemic and find their strategic base,” McKinsey said. “They are pursuing agreements to rationalize their assets, establish or expand their digital capabilities, acquire top talent and otherwise strengthen their competitive positions.”

Companies that take a programmatic approach to mergers and acquisitions have generated on average about 2% more total excess returns to shareholders (TRS) compared to their peers, McKinsey said. The worst M&A strategy is no M&A at all – companies that relied on their own resources to expand their capabilities lagged furthest behind their peers.

“Programmatic M&A is not purely a volume game; it’s a strategy to systematically build new businesses, services and capabilities, ”McKinsey said. “Companies that use a programmatic approach create transaction flows linked to their belief in their business strategy, an understanding of their competitive advantage and confidence in their ability to execute.

A medical device company illustrates the value of programmatic mergers and acquisitions, McKinsey said. From 2000 to 2009, it made an average of one acquisition per year and generated less than 1.5% of TRS.

After a change of management, the company continued in 2010 a programmatic negotiation approach and extended its geographic reach by making six acquisitions each year. The company increased its average annual TRS over the next decade to 2.7%, McKinsey said.

Companies that take a programmatic M&A approach retain an advantage during times of economic crisis, McKinsey said. “Even during the COVID-19 pandemic, the performance of programmatic acquirers significantly outperformed their peers using other M&A approaches, which is consistent with what we’ve seen in previous downturns. “

Still, the programmatic strategy may not be right for all businesses, McKinsey said. “Some companies may face organizational limitations or industry specific barriers. “

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