McKinsey Quarterly reports on a study of 1,000 companies and their approach to mergers and acquisitions. This builds on work we did in the Evergreen project in 2001.
The answer is simple, just don’t do big deals as they will likely lose money. A big deal is defined in the study as one that is greater than 30% of the larger company’s value.
It’s far smarter to become very good at finding, negotiating, buying and absorbing a series of companies that are a lot smaller than the buyer. Even so, buying other companies is a no a panacea – there is plenty of variability in the results, with poor returns and the risk of failure high.
Some industries fare worse than others, and high tech and Telecom are in the mix. We found in 2001 that you simply cannot purchase your way out of a bad situation, and the markets are littered with companies that tried and failed.
In 2001 our sample size of M&A deals was a lot smaller, as it was only part of a larger study. We did see that some firms who had well oiled fundamental business practices, did well buy being programmatic purchasers of smaller companies. It was quite rare, and I stress again that the companies that succeeded in this approach were already superb operators.
In summary my overall perspective has not changed. Purchasing other companies is a good way to grow only if your own company is doing well, if the companies you buy are relatively small versus your own and if you have a well rehearsed plan for what happens after the deal is finalised.