Mastering the Merger
Bain's evidence that frequent small deals beat occasional large ones.
Summary
Harding and Rovit, Bain consultants, examined a large sample of acquisitions and identify four decisions that separate successful acquirers from unsuccessful ones. Their empirical finding is that frequent acquirers who buy consistently through cycles outperform both non-acquirers and infrequent large acquirers.
The four decisions are: whether to pursue a deal at all, which requires knowing the specific investment thesis before any target is identified; how much diligence to do and on what, which they argue should concentrate on the few assumptions the thesis depends on rather than on comprehensive review; what price to pay and when to walk away, which requires setting the maximum before negotiation begins and having a mechanism for enforcing it; and how to integrate, which they argue should be planned around the thesis rather than executed as a standard programme.
Their most useful specific finding is about deal frequency and size. Companies that made many small acquisitions relative to their size, repeatedly, outperformed companies that made occasional transformational deals. They attribute this to accumulated organisational capability in acquiring and integrating, which is learned rather than innate.
The research is Bain proprietary work and is not independently verifiable, and consultants writing about a service they sell should be read with that in mind. The finding about frequent small acquisitions has been supported by later academic work. The integration material is conventional and the book is stronger on the decision to acquire than on what happens afterward.
Key takeaways 7
- Companies that acquire frequently and in small amounts relative to their size outperform both non-acquirers and infrequent large acquirers.
- Acquisition capability is learned through repetition, which is why frequency rather than deal quality explains most of the performance difference.
- An investment thesis stating specifically how the deal creates value must exist before any target is identified, not constructed to justify one.
- Diligence should concentrate on the few assumptions the thesis depends on rather than on comprehensive review of everything.
- The maximum price must be set before negotiation begins along with a mechanism for enforcing the walk-away, since deal momentum defeats judgement.
- Integration should be designed around the specific investment thesis rather than executed as a standard programme.
- Acquisitions made during downturns outperform those made at cycle peaks, and the acquirers who can do this are those with capacity and prepared theses.
Who should read it
Corporate development teams and executives building an acquisition programme who want the evidence on deal frequency, thesis discipline and diligence focus.
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