· success·
A Companies that are best at transac
tions approach
M&A diff
How M&A practitioners enable their success
Companies that are best at transactions approach
M&A differently—but there’s room for improvement across the board.
As of this writing,
the value of M&A in 2015 is on track to rival last year’s, when deal-value
announcements totaled about $3.4 trillion2 —levels not seen since 2008. That level of activity raises
the stakes for companies reexamining their own business portfolios, as the
shifting competitive landscape creates new opportunities—and threats. It may
also explain why respondents who perceive their companies to be more successful
at M&A are also significantly more likely to report looking for
opportunities more often. Whether companies are successful because they look
for opportunities more often or the other way around, we can’t say. But the
correlation, combined with the fast pace of M&A activity in general, does
suggest that more frequent portfolio reviews may be better.
These are among the findings of our newest
M&A survey, which asked executives about underlying trends, what M&A
capabilities their companies do (and don’t) have, and the effectiveness of
their companies’ M&A programs relative to competitors. When we looked at
what makes a company good at M&A, the results indicate that while it’s important
to perform well at every step of the M&A process, the “high performers”
differentiate themselves from others by evaluating their portfolios more often,
moving faster through their due-diligence and execution processes, and building
stronger capabilities for integration. According to the results, though, even
the highest-performing companies could benefit from giving their M&A teams
more effective incentives and from proactively connecting and building
relationships with their potential targets.
Will the pace of M&A
continue?
Among respondents whose companies considered
acquisition targets in the past year, just over two-thirds report completing at
least one deal. Of those that tried but failed to complete an acquisition, 52
percent indicate that their companies engaged with at least one potential
target but, ultimately, did not close the deal.
Most executives expect the next year to bring
as many or more deals as the past one. It’s too soon to tell whether market
volatility in the late summer will affect M&A over the longer term, but at
least as of May 2015, two-thirds of respondents expect the pace of activity
over the subsequent 12 months to continue or increase—and nearly three-quarters
expect these deals will be the same size or larger. Interestingly, those who
anticipate a larger number of deals also expect their value to increase—and
those who expect to do fewer deals expect their value to decline. Looking
further ahead, respondents expect little change to their companies’ rationales
for deals in the next five years, and the most frequently cited reasons all
relate to growth: expanding offerings, entering new geographies, and acquiring
new assets.
More specifically,
respondents from high-tech and telecom companies are significantly more likely
than those in every other industry to expect an increasing number of deals,
though they were not more likely to expect larger ones. Consumer-company
executives tend to expect fewer deals in the next year than their B2B peers.
What high performers do
differently
To better understand companies’ M&A
performance overall and where the best-performing companies differentiate
themselves most from their peers, we identified a group of high performers.
Respondents in this group characterize their companies’ performance as having
met or surpassed targets for both cost and revenue synergies in their
transactions of the past five years. The low performers, by contrast, are
respondents who report that their companies have achieved neither the cost- nor
the revenue-synergy targets in their transactions.
The survey results
indicate a few areas where the high performers do things differently than
others. For example, these respondents are much more likely than the low
performers to report that their companies evaluate their portfolios for
acquisition, joint-venture, and divestiture opportunities
multiple times per year, as opposed to once every one or two years. The inverse
is also true: low performers are significantly more likely to say their
companies look for opportunities once a year or less (Exhibit 1). Notably, the
frequency with which companies (both high and low performers) evaluate their
portfolios for divestiture opportunities is significantly less than it is for
acquisitions or joint ventures.
On average, high- and low-performing companies
tend to move through their due-diligence and deal-execution processes at about
the same speed—up to a point. However, among companies where respondents report
taking six months or more, the pattern diverges. More than one-quarter of
low-performer executives say their companies take longer than six months to
move from a nondisclosure agreement to a binding offer, nearly double the share
of high performers that say they spend the same amount of time
Finally, the high performers stand apart on
the strength of their integration processes. We asked executives about their
companies’ capabilities across the four areas of M&A, and those from the
high-performing companies report proficiency more often in all four than their
peers at low-performing companies do. But their skills are most differentiated
in integration. Interestingly, the two integration capabilities with the
largest percentage-point differences between high and low performers are also
the two capabilities where, overall, respondents report the least proficiency:
effectively managing cultural differences across organizations and setting
synergy targets.
For all their best practices and the strength
of their capabilities, even the high performers have room to improve. When it
comes to incentives, the results suggest that many companies focus on earn-outs
and retention packages for key talent in acquired companies—but often overlook
their own M&A teams. Because there are often different owners throughout a
company’s M&A process, it can be particularly tricky to put proper
incentives in place for each one. So, incentives must balance the promotion of
post-integration success with the successful execution of an individual’s role.
In practice, few executives report that their
companies do this well. Less than half of all respondents indicate that the
incentives of those involved in a given M&A transaction are closely aligned
with the benefits the company extracts from it. Even among the high performers,
only 57 percent agree that their companies are getting this right. For those
that balance their incentives well, the potential for strong overall
performance is striking: 93 percent of respondents who strongly agree that
their companies’ incentives are aligned with their strategic goals are high
performers, versus only 23 percent of respondents who strongly disagree.
Although the high performers have particularly
strong internal processes to identify potential targets, they—and their lower-performing
peers—are least effective at connecting and building relationships with these
targets. For example, not even half of respondents at the high-performing
companies (and just under one-third at the low performers) say their companies
regularly conduct “road shows” or meetings to establish relationships with the
most attractive companies. Executives at both the high- and the low-performing
companies report similar results for using compelling pitch materials to
support even very-early-stage outreach discussions with targets.
Looking ahead
·
Conduct
frequent portfolio reviews. Companies
that systematically evaluate their portfolios for acquisition, joint-venture,
and divestiture opportunities set themselves up to execute their corporate
strategies more effectively. In many strategies, the inorganic component is
critical, and getting that piece right begins with building a sound business
case to define which businesses a company wants—and does not want—in its
portfolio.
·
Invest
in building M&A capabilities. Companies that can build capabilities that support
inorganic growth can enjoy a sustainable competitive advantage. This includes
capabilities that are applicable to the earlier stages of M&A—such as
efficient and effective due diligence and external outreach as part of
proactive sourcing—as well as the core capabilities required to integrate a
company.
·
Pay
attention to governance and incentives. In our experience, many companies will focus on earn-outs
and retention packages for acquired companies but will overlook ensuring that
their own M&A teams have the right setup, governance, and incentives. These
are the necessary foundations upon which distinctive M&A capabilities are
built.
http://www.mckinsey.com/Insights/Corporate_Finance/How_M_and_A_practitioners_enable_their_success?cid=other-eml-alt-mip-mck-oth-1510
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