For the fast-moving consumer goods (FMCG) industry, it’s both a buyer’s and a seller’s market right now. M&A activity, at historically high levels, is up 30% since 2013. This accelerating activity is expected to continue, owing to a confluence of factors that include slowing growth prospects, aggressive private equity buyers, and changes in US tax law.
The urge to engage in M&A is understandable in the current market—with companies seeking to reorient their portfolios, reinforce strengths, and sell underperforming assets—but the long-term data on such deals is decidedly mixed. Business acquisition and integration can be challenging, and success is far from guaranteed. In fact, most deals destroy value. (See Exhibit 1.)
As the competitive landscape evolves and competitors reshape their portfolios, few FMCG companies will avoid the impact of the current wave of M&A. Every deal must therefore be carefully assessed to ensure that it will lead to real value. There is no playbook for success. The approach to every acquisition and the subsequent process of integration must be tailored to the profile of the deal. Each of the four deal types we have observed in the marketplace brings its unique array of opportunities and set of imperatives.
A review of the long-term track record of M&A deals should give executives pause. Over the past 15 years, most M&A deals worldwide have destroyed value—the result, in most cases, of poor preparation and execution, inadequate integration, or bad timing. Still, M&A deals are certainly on the agenda of FMCG leadership teams. For decades, FMCG has been among the most reliable value creators in the business world, but in today’s world, things have changed. (See “Why Consumer Goods Companies Need to Build, Buy, and Broker,” BCG article, December 2017.) Three clear challenges in particular point to increased M&A activity for the FMCG industry.
In the aggregate, these trends point to continued acceleration of M&A activity in the industry. Given the shifting landscape and that many industry leaders are doing deals, companies must not simply maintain their status quo. However, just making deals is not sufficient. Value-creating M&A requires a strategic approach.
On the basis of our proprietary research and experience with clients, we have identified four major types of FMCG transactions: unlocking new growth, upgrading capabilities or business models, combining to transform, and cleaning up the portfolio. Each of them has a distinct value creation objective. (See Exhibit 2.)
Unlocking New Growth. The first type of transaction aims to find new sources of growth. Typically, a large company acquires a small or midsize player that has demonstrated a strong growth trajectory either in existing or new product categories or in markets, channels, or customer bases with high growth potential. Because headwinds have slowed organic growth for most FMCG players, this type of acquisition has become more common. For transactions focused on growth, the following imperatives characterize successful deals:
These “reverse influence” measures should be adopted thoughtfully and at a pace that does not disrupt the target company’s operations. In addition, an acquiring company can foster collaboration by customizing its strategic plan and budget to avoid overburdening the target.
Upgrading Capabilities or Business Models. Significant imperatives for deals based on upgrading capabilities or business models include the following:
Maintain operational continuity for the acquired business model or capability. When the acquirer is not familiar with the capabilities being acquired, an arm’s-length integration can work best: the target company maintains operational control over parts of the business that are foreign to the acquirer. During the learning period of the next one to two years, the acquiring company can identify opportunities for further integration and scale.
For example, a leading consumer packaged-goods company followed this approach, integrating back-office and distribution capabilities in the six months following a 2017 acquisition. It then integrated operations in the year or so after closing the deal, keeping sales and new-product development separate. In addition, the acquirer brought in a new president, who prioritized blending the two company cultures to preserve the best aspects of both.
Combining to Transform. The third deal type is, perhaps, the most visible in the M&A landscape: a company acquires a large player to create value through consolidation or by changing the direction of the business through a dramatic, game-changing merger. Success factors for these kinds of transformative combinations include the following imperatives:
Establish a rigorous program management approach and manage the integration as a discrete process, separate from the day-to-day business. Game-changing deals can be the most complex integrations, involving the management of more interdependencies, significant demands on resources, and an extended timeline. These transactions require dedicated integration teams aligned with the new operating model and sources of value. Buyers should set explicit milestones and timelines for key integration initiatives. They should also establish strong governance and effective decision-making processes along with a rigorous tracking mechanism to ensure that synergy, organization, operations, and system milestones are achieved, monitoring leading indicators that prompt course corrections when they are needed.
For example, when two global food companies merged in 2015, their leadership teams set out clear cost synergy ambitions and established a detailed path toward achieving those goals. The integrated company saw its profit margins begin to improve just a few months into the program and ultimately exceed its savings targets.
Cleaning Up the Portfolio. Acquirers can sell off less-attractive assets to streamline their portfolio and focus on more profitable and high-growth businesses. Changes in US tax law have created favorable conditions for such deals. For example, in early 2018, a global food and beverage company announced the sale of one of its units at a favorable price, and the valuation multiple was materially higher than average historical transaction prices. The seller benefited from the combination of a higher valuation and a lower tax rate.
Key imperatives for portfolio clean-ups and divestitures include the following:
The FMCG industry shows the potential for high levels of M&A activity for the foreseeable future. Management teams can resist this trend, or they can capitalize on it. By understanding the four types of transactions discussed here—and the key imperatives for each type—companies can ride the M&A wave to a more successful and profitable future.