The evidence is growing stronger: companies that practice programmatic M&A are likely to outperform competitors. Our colleagues have been tracking the data for years, measuring not only the market performance but also the remarkable habits of successful dealmakers.1 Now, we’ve taken an additional lens to the evidence, including findings from McKinsey’s most recent Global 2,000 study,2 to better understand what drives shareholder returns. We have identified key actions that programmatic acquirers take and the relationship that those actions have to outperformance. We also disaggregated the levers of excess TSR and zeroed in on how programmatic M&A flows into value creation.
Taking a programmatic approach doesn’t ensure that a company will necessarily create more value than it would by taking a different approach to deals (including choosing to grow organically). However, in the aggregate, companies that take a programmatic approach have a greater likelihood of outperforming. In this article, we’ll look at some of the important actions that they take, the math of outperformance, and the implications for large companies around the world.
Four key actions that programmatic acquirers take
Creating value through M&A takes commitment; the most effective dealmakers build and refine their expertise by doing multiple deals over time. Yet deal counts are the outcome—not the determinant—of having an effective strategy. Programmatic acquirers take four crucial strategic actions to outperform their peers.
1. Move beyond the core
In previous research, our colleagues found that companies were more likely to outperform when they moved beyond, but not too far beyond, their primary businesses.3 Our most recent analysis bolsters that position.
We have found that the most effective acquirers make a larger share of their acquisitions outside of their core businesses in adjacencies (different sectors within the same industry) and “step-outs” (sectors beyond their core industry) than their peers do. Programmatic acquirers anticipate a natural decline of growth in core markets and move aggressively to where the growth is. As a result, they grow faster.
2. Recognize the strategic rationale
Nonprogrammatic acquirers offer traditional reasons for their transactions, such as expanding their product lines or service offerings and scaling core businesses. For instance, they cite better procurement and improved SG&A. At the same time, one in ten nonprogrammatic acquirers struggles to articulate a clear strategy for all their deals. By contrast, programmatic acquirers are relentlessly mindful of their guiding strategies and have broader sets of value-creation rationales (Exhibit 1).
Similarly to nonprogrammatic acquirers, programmatic acquirers may identify traditional business rationales. But they do so to a competitive end. For example, they’ll pursue scale because they recognize that an industry is undergoing rapid consolidation. Or they might seek to improve their margins because they recognize new opportunities from vertical integration.
Some, having built their dealmaking muscles, may even develop and demonstrate a rationale whereby they can recognize, acquire, and rapidly integrate undervalued companies. One European programmatic acquirer has created significant shareholder value from its experience in strengthening target companies’ businesses, even when challenges give other potential acquirers pause. Financial acquirers, such as private equity funds, might deploy a holistic view on value-creation levers. They often focus on improving operating models (for example, implementing commercial excellence through more informed pricing and better account management). As our colleagues have shown, successful public companies can also put private equity best practices to work.4
3. Prioritize value creation over price
Good businesses—particularly growing businesses—usually cost more than others do. Programmatic acquirers are distinct in doing the right deal, even at a higher price, so long as the value created by the deal exceeds the cost of the deal, including the cost of realizing synergies. We have found that these dealmakers are more willing than their peers to acquire higher-valued companies, both in absolute price and relative to their own valuation. The target’s price, in fact, is often a clear indication of its future growth expectations, attracting rather than filtering out sophisticated acquirers. By being willing to pay higher acquisition multiples, programmatic acquirers show a great conviction about their strategies and their ability to create value.
4. Actively divest
Some companies succumb to the temptation of empire building instead of value creation. Being bigger isn’t necessarily more value creating, however. Our colleagues have shown that dynamically reallocating capital to acquire and divest businesses isn’t only highly prized by investors but also a distinguishing feature of companies that adopt programmatic M&A.5 In fact, programmatic acquirers divest twice as often as acquirers that follow a selective or large-deal approach do. They also divest the most over the long term by deal size, as measured by their share of divested market capitalization versus their share of acquired market capitalization. By complementing programmatic purchases with active divestments of less attractive businesses, these companies free up additional capital for acquisitions. This methodical pruning-while-growing method pays off: our Global 2,000 research shows that programmatic divestments generate more than 1 percent median excess TSR, with lower excess standard deviation.
Value creation in action
The effects of best practices in programmatic M&A are particularly stark when one disaggregates excess TSR into its individual components—revenue, margin, valuation multiples, and dividend payout (Exhibit 2). We found that, among programmatic acquirers, about 1.5 percentage points of excess TSR were driven by valuation multiples, which serve as an indicator for investors’ valuation of the businesses’ prospects for future growth. Even as programmatic acquirers divested more businesses (and the revenue generated by those businesses), they kept pace in revenue growth with those that took a different approach, except for large-deal acquirers that acquired top-line growth in a gulp.
Programmatic acquirers create positive excess TSR by continually repositioning their business portfolios for growth via M&A. However, large-deal acquirers tend to follow a different value-creation rationale: they seek to turn their newly bolstered top line into excess TSR, supported by positive margin improvements from scale synergies. With only a 50-50 chance of outperforming industry peers, though, many find themselves with lower valuations and declining changes, and many fail to generate excess TSR.
Superior TSR performance not only provides insight into the performance drivers of M&A but also ties back to what programmatic acquirers do differently. They’re bolder on making out-of-core acquisitions to sustain growth, even as their core businesses mature. They align their companies’ M&A rationales with broader strategic imperatives, have the confidence in their M&A expertise not to view price as an automatic disqualifier, and make sure that they divest nonstrategic businesses while keeping up the acquisition pace. They’re also more likely to be rewarded with higher multiples (Exhibit 3). While positive organic growth remains the main driver for positive TSR across deal types, programmatic acquirers tend to deliver a multiples increase and achieve neutral TSR relative to industry peers, even in the face of growth headwinds.6
For instance, consider one European company whose core business was developing and publishing printed materials, mostly for a targeted professional audience, as the internet was wreaking profound changes for the publishing industry. Over the course of a decade, the company acquired about $1.5 billion worth of companies that slotted into a digitally focused strategy, allowing the company to overcome challenging trends. During the same period, the company also divested about $1 billion of low-potential assets.
In another example, an Asia-based conglomerate whose core businesses are in the industrial and energy sectors was, in 2014, the largest company by revenue in its home country. Adopting a programmatic approach, the company began to expand into higher-growth sectors and markets. As a result, it was able not only to position itself to take advantage of growth tailwinds but also to increase its return on capital employed (ROCE). Between 2018 and 2019, the company made three significant acquisitions in earlier-stage global technology companies, and by 2019 it had closed on nearly 50 deals, most of which targeted technology-oriented companies with higher enterprise value to EBITDA multiples. Programmatic M&A enabled the company to increase its consolidated ROCE by more than a percentage point while also strengthening its position in areas with much greater likelihood for growth.
Putting it all together: Implications for acquirers
Every company is unique, and the appropriate approaches toward M&A should always be bespoke and follow a clearly articulated business strategy. Nor does every company create value in every deal. The weight of the evidence in the aggregate, however, points to three clear takeaways for acquirers.
First, acquirers tend to fare best when they embed programmatic M&A into their strategies and persistently seek to acquire profitable growth. That means not only doing deals in their core sectors but also moving to adjacencies, typically by strengthening a high-growth, secondary business unit where the company already competes—and, sometimes, by going even further beyond their core. These sophisticated acquirers continually pursue growth, so long as they have (or can acquire) the capabilities to be the best owner of the acquired business.
Second, effective acquirers recognize that M&A is a capability, not an event. They build and continually refine their M&A operating models and mindsets. As a result, they relentlessly reallocate capital, not just to do more acquisitions than their peers but to divest more frequently and at greater deal volumes. Their commitment to value creation attracts committed, long-term capital and powers a virtuous cycle. Despite the common wisdom that the market frowns on dealmaking, our research finds that intrinsic investors—the active, long-equity funds that are the most likely to move the market—identify dynamic capital reallocation as the most desired behavior from CEOs.
Finally and fundamentally, the most successful dealmakers commit to long-term value creation not just in words but in action. For example, while these sophisticated acquirers don’t ignore target price, they aren’t cowed by it, either. In our experience, programmatic acquirers develop an experience-based perspective on what a fair price is. This steels their resolve to execute an “expensive” deal when the price plus the value of the synergies is value accretive. In fact, our findings show that programmatic acquirers tend to buy at higher multiples—and then proceed to overcome nonprogrammatic acquirers in excess TSR. They’re much more ambitious than others in setting—and effective in capturing—higher synergy targets. They also pull a more expansive array of levers to realize meaningful operating improvements. Private equity acquirers, which dig into target operations root and branch, show what’s possible for public company strategic acquirers, so long as those acquirers have the commitment to prioritize long-term, outsize value creation over solving for quarterly earnings targets.
Programmatic M&A has consistently proven, in the aggregate, to be the most effective approach to dealmaking. By analyzing key actions that programmatic acquirers take, we can better understand why these acquirers tend to outperform their peers. And by disaggregating excess TSR, we can identify how a programmatic approach creates more value over the long term.
