VideoThe numbers do not inspire confidence.
Over and over, studies of mergers and acquisitions show that deals fail to create shareholder value. One recent survey says that more than 70 percent of acquisitions fail; another, 61 percent.
A third study reports that 89 percent of acquired businesses actually lose market share. True, some observers have suggested that given enough time, the success rate of acquisitions rises.
And some argue that mergers do succeed if measured against the proper yardstick. But while there is debate about the payback, no one would deny that acquisitions are fraught with risk.
Fifty years ago, businesses typically pursued organic growth, and mergers were fairly rare, according to Richard L. Nolan, professor emeritus at Harvard Business School. Today, mergers seem to have eclipsed organic growth as the business expansion vehicle of choice. For a variety of reasons, companies need to buy other companies — to gain market share, to enter new markets, to acquire technologies, to integrate vertically, and so on.
"There are a lot of businesses where growing organically is not enough to meet market expectations," says David Harding, a partner at consulting firm Bain & Co. and co-author (with Sam Rovit) of Mastering the Merger. Thus, many finance chiefs will find themselves one day confronting the daunting odds of making a successful acquisition.
How can they improve their chances? One way, as evidenced by a number of recent articles and books, is to study and learn from other companies' merger mistakes — which, unfortunately, are many and varied. Another way, presented here, is to focus on the key habits of frequent, successful acquirers. In the course of studying more than 1,700 companies, Harding and Rovit identified a pattern: companies that do a lot of small deals produce much better results, achieving nearly twice the excess shareholder return of intermittent buyers (calculated by subtracting the company's cost of equity from total shareholder return). Frequent acquirers learn from each deal; the CFOs at these companies hone their acquisition skills, much like the professional buyers in the private-equity world do.
With a clearly defined acquisition strategy, strictly enforced target-selection criteria, and careful attention to both transaction mechanics and integration planning, these frequent acquirers have been able to generate above-average returns, while at the same time quietly folding dozens of new companies into their businesses. Such small transactions may not grab the headlines of a blockbuster deal like AOL-Time Warner or Hewlett-Packard-Compaq, but few CFOs are looking for such headlines. Instead, learning through experience, they seek to complement their organic growth with well-timed purchases.
From discussions with finance chiefs and business-development heads at six frequent acquirers — Dover, Wells Fargo, Charles River Laboratories, VF, Clear Channel Communications, and CRA International — we distilled the following advice. Their hard-won lessons can cut through the clutter of acquisition statistics and theory and serve as practical deal-making guidelines. Call them the secrets of the M&A masters.
1. Never Stop Shopping
The most critical factor of a successful deal is the most obvious one: finding a good target. "Very simply, you can't make good stew unless you have good ingredients," says Bob Tyre, vice president of corporate development at Dover Corp., a diversified manufacturing company with $5.5 billion in 2004 revenues that makes 10 to 20 acquisitions annually.
And as any good cook knows, you have to shop around to find the best ingredients. Companies should be constantly scanning the marketplace for possible acquisition candidates, rather than simply reacting whenever investment bankers bring news of potential targets.
"We're really always in the market," says Thomas Ackerman, CFO of Charles River Laboratories Inc., a global provider of research and testing services to the biotechnology and pharmaceutical markets and health-care institutions, with $767 million in revenues. The company has a small-business development team devoted to the task of identifying attractive acquisition opportunities, and business managers throughout the company are encouraged to present acquisition-oriented as well as organic-growth strategies.
VF Corp., a Greensboro, North Carolina–based apparel company that in recent years has bought such well-known brands as Nautica, Reef, and The North Face, has moved toward a similar "always on" approach to acquisitions, says Bob Shearer, CFO of the $6.1 billion company. "In the past, we would evaluate opportunities as they came to us," he says. "We've been much more successful in evaluating our own capabilities and being more proactive rather than reactive. In our more recent acquisitions, we've approached companies ourselves."
2. Know What You Want
A clearly articulated vision of what makes a target attractive also helps frequent acquirers stay on track. Grasping for a company simply because it's on the market, or because a competitor wants to buy it, can lead to overpayment or a misguided purchase.
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