McKinsey on Finance
Number 36, Summer 2010 Perspectives on Corporate Finance and Strategy 2 The five types of successful acquisitions 10 McKinsey conversations with global leaders: David Rubenstein of The Carlyle Group 21 Why Asia’s banks underperform at M&A 25 Five ways CFOs can make cost cuts stick
8 A singular moment for merger value?
32 The right way to hedge
The five types of successful acquisitions
Companies advance myriad strategies for creating value with acquisitions—but only a handful are likely to do so.
Marc Goedhart, Tim Koller, and David Wessels
There is no magic formula to make acquisitions successful. Like any other business process, they are not inherently good or bad, just as marketing and R&D aren’t. Each deal must have its own strategic logic. In our experience, acquirers in the most successful deals have specific, wellarticulated value creation ideas going in. For less successful deals, the strategic rationales—such as pursuing international scale, filling portfolio gaps, or building a third leg of the portfolio—tend to be vague. Empirical analysis of specific acquisition strategies offers limited insight, largely because of the wide variety of types and sizes of acquisitions and the lack of an objective way to classify them by strategy. What’s more, the stated strategy may not
even be the real one: companies typically talk up all kinds of strategic benefits from acquisitions that are really entirely about cost cutting. In the absence of empirical research, our suggestions for strategies that create value reflect our acquisitions work with companies. In our experience, the strategic rationale for an acquisition that creates value typically conforms to at least one of the following five archetypes: improving the performance of the target company, removing excess capacity from an industry, creating market access for products, acquiring skills or technologies more quickly or at lower cost than they could be built in-house, and picking winners early and helping them develop their businesses. If an acquisition does not fit one or
more of these archetypes, it’s unlikely to create value. Executives, of course, often justify acquisitions by choosing from a much broader menu of strategies, including roll-ups, consolidating to improve competitive behavior, transformational mergers, and buying cheap. While these strategies can create value, we find that they seldom do. Value-minded executives should view them with a gimlet eye. Five archetypes An acquisition’s strategic rationale should be a specific articulation of one of these archetypes, not a vague concept like growth or strategic positioning, which may be important but must be translated into something more tangible. Furthermore, even if your acquisition is based on one of the archetypes below, it won’t create value if you overpay. Improve the target company’s performance Improving the performance of the target company is one of the most common value-creating acquisition strategies. Put simply, you buy a company and radically reduce costs to improve margins and cash flows. In some cases, the acquirer may also take steps to accelerate revenue growth. Pursuing this strategy is what the best privateequity firms do. Among successful private-equity acquisitions in which a target company was bought, improved, and sold, with no additional acquisitions along the way, operating-profit margins increased by an average of about 2.5 percentage points more than those at peer companies during the same period. This means that many of the transactions increased operating-profit margins even more. Keep in mind that it is easier to improve the performance of a company with low margins and low returns on invested capital (ROIC) than that
of a high-margin, high-ROIC company. Consider a target company with a 6 percent operating-profit margin. Reducing costs by three percentage points, to 91 percent of revenues, from 94 percent, increases the...
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