BCG: 10 lessons learned from 20 years of M&A analysis

What does it take to succeed in M&A?

This is the question leading consultancy BCG has been exploring over the last 20 years – with insights published annually in its Global M&A report. This year marks the 20th anniversary of the report.

Among the many pivotal factors encountered by BCG over the last 20 years, ten imperatives have stood out as consistently crucial for dealmaking success. These have withstood the test of time, remaining as significant today as when they were first identified – not to mention, relevant globally.

1

Be prepared and systematic

While dealmaking is an opportunistic activity, with potential deals always surfacing, dealmakers must always ensure preparation. Having the right teams, tools and established processes in place comes in very handy when the reality of a deal suddenly emerges.

BCG advises having a detailed M&A strategy lined to the company’s strategic direction, along with carefully thought-out target search criteria, clear financial guardrails for evaluating deals, and playbook for due diligence and especially post-merger integration.

“In our many analyses, we have found that acquisitions fail far more often because of a misguided M&A strategy or inappropriate approach to integration rather than because of excessively high purchase prices or inadequate due diligence.

2

Build experience – it matters

It may sound obvious, but dealmaking experience pays off. Experienced buyers can accelerate more quickly in time-critical dealmaking situations and are more precise in their due diligence – with knowledge of where the pitfalls lie. They know when to go to market, can prepare assets properly, and negotiate more shrewedly. They also know when to walk away from a deal that is not meeting objectives.

“Our research has repeatedly confirmed that companies that regularly engage in dealmaking create superior returns, while less-experienced companies tend to destroy value.”

3

Master the art of timing

When it comes to business matters generally, timing is crucial. In M&A specifically, arriving late, whether in the broader dealmaking or business cycle or in a specific deal situation, typically results in diminished post-deal value creation or a missed opportunity altogether.

“Our research indicates that dealmakers achieve the highest returns early in the cycle, often within the first two years.”

Interestingly, downturns have consistently proved to be prime periods for deal hunting. But optimal timing can fluctuate depending on sector, region, and economic situation, as well as on company-specific factors.

4

Go outside your comfort zone, but not too far

Ever since conglomerates went out of fashion, the Western consensus has been that the best approach is to focus on the core business —not least from a shareholder perspective. But in the M&A context, the situation is more nuanced.

“Our research shows that deals involving a company’s core products or regions do not create the most value. Rather, transactions in which dealmakers go outside their comfort zone yield higher returns over the long term.”

The lesson is, go beyond your comfort zone, but do not stray too far. So, cross-border deals, for example, are most successful if they remain in a company’s core region – understandable, given the challenges posed by unfamiliar regions and cultures. Deals focused on adjacent products and services that lie relatively close to a company’s core offerings yield more value than those that aim for broad diversification. At the other extreme, although pure rollups and scale expansions can be beneficial, they are unlikely to drive long-term outperformance.

Staying ahead of the pack means a focus on innovation and a certain degree of continuous reinvention. Just sticking to one's core may be effective for a while, but eventually a broader strategy is necessary.

5

Focus on synergies

The importance of emphasising synergies might seem obvious, but by making acquisitions feasible when a target is not sufficiently attractive by itself, synergies allow corporate buyers to edge out financial sponsors in tight bidding situations.

Merely identifying potential synergies is a far cry from realising them, however, and their value diminishes if the buyer simply passes them on to the seller via a higher purchase price.

“Our research reveals that, over the past 15 years, buyers in public M&A deals have retained only about 50% of synergies; the rest tends to be factored into the purchase price, although this rate fluctuates with market conditions. Our studies continuously indicate that insufficient or unrealised synergies are among the main reasons why some deals are deemed failures.”

To address this effectively, BCG recommends beginning with a precise synergy estimate – which means intensive analysis starting from the outside in before the deal even begins. This proactive approach means bidders dedicate more attention to second and third-order questions in the due diligence phase, optimising their use of the limited time. Solid synergy estiamtes lead to better valuations and more effective negotiations – and once the deal is done, the focus should quickly move to capturing the synergies.

“Buyers should enlist the support of a clean team composed of third-party personnel no later than between signing and closing. This team can facilitate the exchange of highly sensitive data that is critical for refining synergy estimates.”

Companies must transform their thorough synergy estimates into tangible savings and growth, a task that requires a rigorous approach to post-merger integration z- o units responsible for integration should be deeply involved in synergy estimations from the outset.

6

Pay more, but only with cash

Conventional wisdom suggests that overpaying is never profitable, but BCG research finds this is not wholly true. Although the greatest value creation typically arises from deals with below-average multiples, maximum benefits emerge when low multiples are paired with high premiums over current market valuations.

“Perhaps counterintuitively, this insight suggests that dealmakers should seek opportunities where they can afford a substantial premium over an asset's current market value due to the asset's low valuation and the potential for significant synergies,” suggests BCG.

In simpler terms: look for bargains, especially in today's fluctuating market environment.

After identifying undervalued targets, rely solely on cash for transactions – as this approach ensures discipline, particularly in valuations. Stock-for-stock mergers tend to underperform, resulting in subdued investor expectations as reflected in lower announcement returns.

7

Don’t be seduced by mega deals

While mega deals appear to promise a legacy-defining transaction for executives, sadly, these large-scale deals more often erode value than enhance it, BCG research finds. Engaging in major transformative M&A is an extremely risky strategy, given the intricacies of due diligence, execution, and post-merger integration. Such deals can also distract management, causing them to overlook other critical areas of the business.

"Our research consistently shows that serial acquirers of small to mid-size targets generate the highest long-term value creation. Although these smaller acquisitions demand recurring effort, they are simpler to evaluate, manage, and assimilate. Regularly engaging in such deals strengthens the organisation's M&A capabilities, fostering experienced and well-coordinated teams, streamlined processes, and tested playbooks."

8

Think outside the box

Traditionally, the default tool for dealmakers has been the plain-vanilla 100% acquisition, on both the buying side and the selling side. Over the past two decades, majority deals outnumbered minority ones by about 3 to 1, although the annual ratio has evolved from 4 to 1 two decades ago to 2 to 1 more recently, largely owing to the rise in VC financing. The attraction of majority deals is evicent: they are relatively simple to value and negotiate, amenable to straightforward governance after closing.

But in today's ever-more-complex M&A and business landscape, this approach is not always optimal.

"We have observed a consistent rise in alternative deal types, such as minority shareholdings, joint ventures, strategic partnerships, and corporate venturing. These structures may be more complex to execute and manage after closing, but they open new strategic options by giving dealmakers much-needed flexibility to customise capital allocation in response to specific conditions. Given the shift from the past decade's abundant capital to the current scarcity, these alternative approaches have become an indispensable part of an experienced dealmaker’s toolbox."

9

Embrace transparency

Within the typically guarded world of M&A, some executives may not view open communication as a priority. But BCG research indicates that strategic communication at specific stages of the M&A process can bolster value creation.

"First, investors should not be surprised by potential acquisitions. Putting them on notice requires having an M&A strategy that is clear and well-communicated without limiting management’s strategic flexibility. Second, once a deal is signed, communicating credible and sufficiently detailed plans for synergy and integration (including material ESG efforts) gives investors a baseline for measuring deal success and instills confidence in management’s ability to deliver. Third, internal communication is equally vital."

Effective dialogue within the organisation facilitates the integration of new acquisitions by setting a unified vision and purpose from the outset.

10

Double down on integration design and execution

The importance of execution to successful deal outcomes cannot be overstated.

"One of our most extensive studies on deal success factors reveals that 30% to 40% of deals fail as a result of, among other factors, poor planning or a lack of strategic fit. In almost half of the failed deals, inadequate or misguided post-merger integration was either among the root causes or the primary cause of the disappointing value creation."

It is essential to remember that closing a deal is only the beginning of the journey. The true challenge of value creation lies ahead, and missteps can negate the hard work that preceded the closing.

Following BCG's 12 imperatives for integration success, based on over two decades of hands-on experience, can help companies avoid pitfalls.