"What's striking about the best acquirers is the lengths they go to develop their acquisitive strategy and analyze potential acquisition candidates. This allows them to move swiftly, value accurately, and bid intelligently when the time is right"
Kermit King, a vice president in BCG's Chicago office

The widespread skepticism about the value-creating potential of mergers and acquisitions (M&A) is unwarranted, according to a new study by The Boston Consulting Group. Despite research showing that most mergers fail to create value for the acquirer's shareholders, companies that systematically pursue acquisitive growth outperform those that make few or no acquisitions.

The BCG study, Growing Through Acquisitions, analyzes the long-term stock-market performance of 705 public U.S. companies during the ten-year period from 1993 to 2002. The study divides the sample into three groups on the basis of their level of merger-and-acquisition activity. The highly acquisitive companies in the sample had the highest median total shareholder return (TSR)—more than a full percentage point per year greater than the median TSR of companies that made few or no acquisitions. This performance translated into a 29 percent higher return over the full ten years of the study.

The BCG study, designed to determine whether the stock market rewards acquisition-driven growth strategies, differs markedly from most research on merger performance. Instead of focusing on the short-term performance of individual deals, it examines the long-term—ten year—performance of acquisitive strategies, by analyzing individual companies categorized by their degree of acquisition activity. "We believe ours is the first study to take this approach," said Kees Cools, head of research for BCG's Corporate Finance and Strategy practice and professor of corporate finance at the University of Groningen in the Netherlands. "It allows us to avoid some of the common pitfalls of most M&A research.

The BCG research demonstrates that there is no inherent disadvantage to growth by acquisition. On the contrary: under the right circumstances, it can be the best way to generate growth above the cost of capital. "The successful acquisitive companies in our sample carefully managed the tradeoff between growth and return on investment—growing only when they were making returns above the cost of capital," explained Cools. "They also managed their financial policies differently—carrying higher debt and paying lower dividends—but were still rewarded by investors for the value creation of their deals."

Growing Through Acquisitions based on BCG's work on more than 2000 M&A projects over the past ten years, also describes how companies can become successful acquirers. In addition to understanding clearly the role of M&A in achieving their growth strategy, successful acquirers are unusually rigorous when it comes to valuing and pricing potential details, and pay at least as much attention to the details of postmerger integration (PMI) as they do to the deal itself.

"What's striking about the best acquirers is the lengths they go to develop their acquisitive strategy and analyze potential acquisition candidates—well before they bid on any particular deal," said Kermit King, a vice president in BCG's Chicago office and a coauthor of the study. "This allows them to move swiftly, value accurately, and bid intelligently when the time is right."

"They are also extremely thorough when it comes to postmerger integration," added Miki Tsusaka, a senior vice president in BCG's New York office and a coauthor of the study. "They understand that speed is of the essence, but they don't let the high-pressure environment of PMI force them to declare victory too early. They make sure they identify and capture the full range of cost and revenue synergies available in combining the two companies."