Risk

M&A Is Better in Small Gulps

Doing two small or midsize deals a year around a specific theme tends to deliver higher returns than attempting large takeovers.
Andy WestDecember 16, 2021

Mergers and acquisitions are back in a big way. Through the first nine months of 2021, the value of global M&A reached almost $4.3 trillion — comfortably more than the full-year $4 trillion in 2015. The third quarter was robust ($1.4 trillion), with corporate transactions (3,500 deals worth more than $900 billion) dominating. All this hints at a momentum that is far from spent. Indeed, with so much going on, there may even be peer pressure to get in the game as economic activity picks up.

Getting into the game may be a good idea, given the reshaping of supply chains, shifts in competition, and changing economic conditions. But some M&A deals work spectacularly well and some fail. So what can companies do to improve the odds of success?

For 20 years now, McKinsey has asked that question of the world’s 2,000 largest public companies. Our findings consistently show one approach has outdone all others: “programmatic M&A.” Programmatic M&A is making at least two small or midsize deals a year around a specific business case or theme. The total market capitalization acquired is usually meaningful but not massive (around 20% of market capitalization).

Why is programmatic M&A better than the alternatives?

It delivers higher shareholder returns. From 2010 through 2020, including at the peak of the COVID-19 pandemic, companies that did programmatic M&A delivered about 2% more in excess total returns to shareholders (TSR) annually compared with those that did organic, selective, or large-scale deals. Even in sectors where other acquirers had a positive TSR, programmatic acquirers almost always did better. Two out of the three companies that practiced programmatic M&A outperformed their peers.

Programmatic complements large-scale transactions. Large-scale transactions, defined as those in which the market cap of the target is at least 30% of the acquirer’s, are essentially a coin toss — they deliver at least some value about half the time. Adding a dose of programmatic M&A improves the odds. Companies that pursued large deals during the 2010s but augmented this approach with programmatic M&A generated an average of 1% more a year in TSR.

It works well even during volatile times. During the COVID-19 pandemic, programmatic acquirers’ performance far outpaced the rest. That’s consistent with their record in prior downturns. For example, during the financial crisis, companies that used a programmatic approach to M&A delivered excess returns to TSR with less volatility than companies that used other M&A strategies. That kind of performance builds confidence: only 13% of programmatic acquirers paused their M&A activity in 2020, compared with 31% for the rest.

Programmatic acquirers are more likely to strongly agree that they have a clear understanding of their source of competitive advantage. As a result, they are well-positioned to identify the financial and operational scenarios that build on their strengths.

However, making more deals doesn’t mean they will be better ones: companies need to have the right skills for M&A to contribute to developing new businesses, services, and capabilities. What we have found, however, is that perhaps because programmatic acquirers are doing more deals, they seem to have done just this. They have a shrewd understanding of these areas:

Competitive advantage. Programmatic acquirers are 1.5 times more likely to strongly agree that they have a clear understanding of their source of competitive advantage. As a result, they are well-positioned to identify the financial and operational scenarios that build on their strengths. That allows them not only to make decisions quickly but to make portfolio moves that are consistent with their strategy — and to avoid making rash moves out of fear of missing out. To give just one example, a luxury-goods firm completed almost 50 deals between 2010 and 2020, racking up healthy overall returns. Those acquisitions played a vital role in entering new product categories and reaching new markets. 

The business case for each transaction. Programmatic acquirers know why they buy, having identified the most essential themes they want to pursue. That is one reason why they are considerably more likely than their peers to reach out to targets proactively. Programmatic acquirers are also more likely than their peers to build comprehensive business cases around potential M&A targets; they can explain how the proposed acquisition will add value and at what cost. They avoid deals that don’t fit their overall strategy. In short, they know what they want to achieve. That may sound obvious, but it is far from ubiquitous.

What to do to make a transaction work. Practice makes better. Because programmatic acquirers don’t have to reinvent the wheel for every due-diligence process or integration plan, they can execute more transactions while creating more value from each. And they can act quickly because of the infrastructure they have built. 

Programmatic M&A does not generate big headlines; large deals and organic acquisitions still have their place. But after 20 years of research, the evidence is clear: Programmatic M&A strategies are the most likely to create the most value for companies, with less risk.

Andy West is a senior partner in McKinsey & Co.’s Boston office.