Managing Director & Senior Partner
The evidence is conclusive, as we show elsewhere in this year’s M&A report: portfolio masters (companies that execute at least five major transactions, buying or selling, over a five-year period) outperform other dealmakers over the medium and long term. (See “Are M&A Deal-Making Skills Value-Creating Skills?,” BCG article, August 2016.) But what do portfolio masters do differently—or better—when it comes to M&A?
Based on interviews we conducted two years ago with senior managers, investors, and sell-side analysts about successful serial acquirers, we concluded that the single factor that most often distinguishes these companies is their willingness to invest large amounts of leadership time, money, and organizational focus in support of their M&A strategy—in advance of any particular deal. (See “Lessons from Successful Serial Acquirers,” BCG Perspectives, October 2014.) Our 2016 analysis of thousands of transactions over the 25 years from 1991 through 2015 identifies four additional characteristics that distinguish portfolio masters from other companies in both their buying and selling activities.
The four key characteristics of portfolio masters, which other companies can emulate, are:
Be bold. Portfolio masters are not shy about paying up when they have an attractive transaction in their sights. They are willing to pay top multiples and high premiums in order to land their targets, which evidences confidence in their target analysis and selection process as well as in their ability to make the deal work. (See Exhibit 1.)
In our sample, portfolio masters pay, on average, a multiple of almost 12 times EBITDA, compared with multiples of 10.3 and 10.1 times EBITDA paid by strategic shifters and one-timers, respectively. This shows that for the right quality asset, portfolio masters do not shy away from paying high valuations. The fact that portfolio masters also pay higher deal premiums—an average of 2 to 3 percentage points higher—further underscores that they are more confident they will achieve higher synergies and therefore willing to strike when the deal is right.
Portfolio masters also do more of their deals purely in cash, another indication of confidence: approximately 60% of acquisitions by portfolio masters were paid for with cash only, compared with 46% by one-timers. Knowing that they can harvest deal synergies, portfolio masters are less willing to share the future upside with the target company’s shareholders, and they know that cash deals generally require a smaller premium than those involving stock because cash removes any uncertainty as to the value to the target’s shareholders.
Buy growth over margin. Portfolio masters systematically swap their portfolio assets for higher growth—that is, they buy higher-growth companies and sell lower-growth operations—in stark contrast to one-timers and strategic shifters, which do the reverse. Revenue growth is a key driver of TSR, and portfolio masters use M&A to boost growth and weed out lower-growth assets. (See Exhibit 2 and “The Return of Growth,” BCG article, December 2015.) To achieve growth, portfolio masters are even willing to add lower-margin firms to the portfolio (reflected in the largest margin differential of close to 3 percentage points between portfolio masters’ existing portfolios and those of their targets), since they are confident that they can improve the target’s EBITDA through effective PMI.
Don't worry about the market. When it comes to deal making, portfolio masters are generally the most agnostic about the broader economic picture (as measured by GDP) and market uncertainty (as measured by stock market volatility). They buy and sell in all types of environments. (See Exhibit 3.) Our sample indicates that portfolio masters actually prefer higher-volatility markets, which offer them the opportunity to deploy their full M&A capabilities in an environment of uncertainty when competitors hesitate or are less sure.
While portfolio masters are most active during periods of low growth and high volatility, they generate positive excess returns (as measured by one-year post-transaction announcement RTSR) across all market cycles, regardless of growth-volatility combinations.
Portfolio masters’ success in all environments suggests that they have a high level of agility in adapting their capabilities and processes to changing circumstances and operate with a long-term view. They regard M&A as an always-available weapon in their strategic arsenal; transaction sourcing, executing, and integrating are all part of daily business life. They are motivated far more by strategic rationale than circumstantial incentives (such as cheap funding).
Move fast. With an average closing time of 72 days for acquisitions and 82 days for divestitures, portfolio masters execute transactions 30 days faster than one-timers, which lose one full month between contract and closing—a time when they have limited control over their assets. This gives active dealmakers a head start on PMI or ensures earlier carve-out execution, which is where much of the value in M&A is realized.
Portfolio masters reap higher returns. But can companies increase their returns for shareholders by moving up the M&A ladder, from one-timer to strategic shifter or portfolio master? The evidence suggests that they can. (See Exhibit 4.)
For example, the 37% of one-timers that moved up to strategic shifters generated average one-year RTSR of 4.5%. The 16% of strategic shifters that moved up to portfolio master status generated average one-year RTSR of 4.8%. By comparison, companies that stayed in place or moved down the M&A ladder generally saw minimal or even negative RTSR as a consequence.
Take the example of pharmaceutical company Actavis that became Allergan through a $71 billion acquisition in 2015. (See Exhibit 5.) Since 2001, the company increased its deal activity over the course of three successive five-year periods—starting with 1 transaction (2001 through 2005), followed by 3 transactions (2006 through 2010), and then 15 buy- and sell-side transactions (2011 through 2015). Over the same time horizon, it improved average annual TSR from –9% to 43%.
CEOs should take note. Consistent deal making creates value, and not making deals does a disservice to investors. This does not mean that every company, or management team, is cut out to become a deal-making machine. But those managements that do not hone their M&A skills and deploy them on a continuing basis are effectively leaving a powerful value-creating tool unused in the toolbox.