While M&A deals and turnarounds are individually hard to pull off, combining the two can be even more challenging. Yet based on our research, including an analysis of roughly 1,400 M&A-based turnarounds between 2005 and 2018 in which the target had experienced a drop in performance before acquisition, we have identified six factors that can help acquiring companies improve their odds of success.
In the current business environment, M&A and turnarounds are both increasingly important. Let’s start with M&A. As long-term growth rates trend downward in many economies, business leaders are turning to acquisitions to fuel growth. According to research by our colleagues at Boston Consulting Group, roughly 36,000 M&A deals were announced worldwide in 2017, about 6,500 more than the long-term annual average.1 That trend continued into 2018, when the total value of transactions fell just shy of the record set in 2007.2 However, research has consistently found that most of these deals fail to create value,3 and our analysis supports that.4
Turnarounds are also becoming imperative. Companies face a seemingly endless stream of disruptions from new technology, emerging competitors, shifts in consumer behavior, regulatory changes, slowing economic growth, and other threats, any of which can hurt performance and require substantial and prompt changes in operations and strategy. We have found that, at any point in time, 1 in 3 companies requires a turnaround due to a significant deterioration in total shareholder return (TSR).5 Furthermore, the current economic environment may amplify this need. As of early 2019, leading global economic indicators have weakened, economists and policy makers generally expect growth to slow even more over the next couple of years, the stock market has been increasingly volatile, and geopolitical risks are multiplying — all of which are likely to further threaten companies’ performance and increase the need to transform. Still, only about 1 in 4 turnaround programs leads to long-term improvements in performance.6
Turnaround acquisitions make up roughly half of all M&A deals. (And the share of such turnaround deals is likely to increase should the economy experience a downturn — as was the case during the last recession, when turnarounds comprised nearly 60% of all M&A deals.)
1. Long-term average refers to 2000-2017. J. Kengelbach, G. Keienburg, and T. Schmid, et al., “The 2018 M&A Report: Synergies Take Center Stage,” Boston Consulting Group, Sept. 12, 2018, www.bcg.com.
2. S. Basak and K. Porter, “Goldman Set to Lead M&A for 2018 After Buyout Firms Lift Business,” Bloomberg, Dec. 28, 2018, www.bloomberg.com.
3. A. Lewis and D. McKone, “So Many M&A Deals Fail Because Companies Overlook This Simple Strategy,” Harvard Business Review, May 10, 2016, https://hbr.org; and D. Walker, G. Hansell, and J. Kengelbach, et al.,“ The Real Deal on M&A, Synergies, and Value,” Boston Consulting Group, Nov. 16, 2016, www.bcg.com.
4. To assess performance, we looked at total shareholder return (TSR), a metric that includes both capital appreciation and dividends, as that is a more comprehensive indication of performance than changes in the share price alone.
5. A two-year decline in TSR of at least 10 percentage points.
6. M. Reeves, L. Faeste, and K. Whitaker, et al., “The Truth About Corporate Transformation,” MIT Sloan Management Review, Jan. 31, 2018, https://sloanreview.mit.edu.
7. R&D spend by sector represents median values, computed based on our data set of M&A deals.
8. M. Reeves, C. Dierksmeier, and C. Chittaro, “The Humanization of the Corporation,” Boston Consulting Group, Feb. 8, 2018, www.bcg.com.
i. R. Weisman, “Sanofi Chief Says Genzyme Purchase Paid Off,” The Boston Globe, Sept. 19, 2013.
ii. We determined the ESG scores of both buyer and target based on Eikon data.