Valuation

Although at first glance the success of large deals appears to be a coin flip, important insights can be gained by studying the outperformers. The 2022 study identified four commonalities of companies that successfully created value through large transactions. They each (1) pair a large-deal approach with a programmatic one (discussed next), (2) have a healthy corporate culture, (3) possess a source of competitive advantage, and (4) focus on revenue growth, continually resetting cost baselines to perform better than competitors.

Although studies of announcement effects give useful results for large samples, the same approach cannot be applied to individual transactions. 6 While the market may correctly assess the results of transactions on average, that statistic does not mean its initial assessment of a single transaction will always be correct.

To overcome these challenges, several of our colleagues looked at acquisition programs of companies, rather than single acquisitions. 7 In their most recent analysis, they examined 2,000 nonbanking companies from 2013 to 2022 and grouped them into four categories:

Programmatic acquirers completed an average of two or more acquisitions, often smaller or midsize, per year.

Large-deal acquirers completed at least one deal that was larger than 30 percent of its value.

Organic companies conducted almost no M&A.

Selective acquirers did not fit into the other three categories.

Exhibit 31.5shows the results, including median TSRs versus peers, along with the 25th and 75th percentiles. Based on medians, programmatic acquirers performed best. That said, the medians conceal important details. Note that the band of 25th to 75th percentiles is very large and overlaps across the different acquisition strategies. Of all the categories, the distribution of the programmatic acquirers has the most positive and tight skewing. The case of organic companies is interesting for its very wide distribution of results. This is not surprising, since the sample includes fast-growing, younger companies with high TSRs, as well as declining or troubled companies focused on managing decline.

EXHIBIT 31.5Success Rates of Acquisition Strategies

1 Companies that were among the top 2,000 companies by market cap (>$2.5 billion) as of Dec. 31, 2012, and were still trading as of Dec. 31, 2022. Excludes companies headquartered in Latin America and Africa.