As senior management teams start to work through their 2017 strategies and hope it keeps them on track for five-year growth goals, few of them will be pursuing a big merger or acquisition.
Although anyone wanting to step into a CEO’s office at some point may daydream about the publicity and glitz that goes with a mega merger, they would readily agree that there’s a huge amount of risk involved – both for the business and their own career. And that means companies often pursue smaller bets, trying to add to their business in a way that doesn’t risk everything.
There is a fine line to walk here. Big deals can go spectacularly wrong because of poor integration or insufficient due diligence up front and management teams – inspired by all the glamor and attention – can get carried away in bidding wars to secure a target at all costs, which can then lose their firms eye-watering amounts of money. But for companies that choose the right opportunities and run a successful post-merger integration, big deals can propel them far ahead of the competition.
CEB’s ongoing analysis of “efficient growth leaders” – those firms that have sustained long-term revenue growth while simultaneously improving margins over the past 15 years – shows that they are able to consistently make large, inorganic growth bets. Despite conducting only one more M&A deal on average than their peers, these deals are an average of 42% larger (see chart 1).
Finance teams can play an important role in helping senior management teams make bigger bets. They can help them overcome risk aversion, help them prioritize the right targets, and be confident in funding bigger bets.
Chart 1: Average M&A expenditure as a percentage of revenue divided by total disclosed deal volume 1999-2014; n=120 (60 efficient growth leaders, 60 control group companies) Source: CEB analysis
How to Play the M&A Game
One large agri-business in CEB’s networks provides a good tactic to help senior managers make better M&A decisions. After comparing projected growth goals to historic acquisition performance, the firm’s management team realized they needed to improve their M&A pipeline if they were to meet desired growth projections over the next five years. The team needed a disciplined and objective way to determine the direction they wanted the company to grow in, to build out the deal pipeline, and subsequently filter acquisition targets.
So the company created an M&A “game board” to facilitate the right communication between senior executives (who provide long term direction), corporate development teams (who focus on target availability and pricing), business unit leaders, and other stakeholders (i.e. IT platform leaders and R&D teams).
The game board displays inorganic and organic growth investment opportunities and highlights how a prospective investment could add value in specific regions over time for a specific business.
By mapping attractive opportunities across the entire value chain, the game board helps guide discussions around organic growth options and potential acquisition strategies. It forces managers to think about potential investment trade-offs in light of the firm’s desired growth direction.
These clear visualizations help different stakeholders challenge underlying growth assumptions, determine the right “growth pathway,” and reach consensus on what growth investments to pursue.
The process helped the company to hit growth goals through a combination of organic growth investments and, crucially, pursuing the right size of M&A targets.