McKinsey: How M&A practitioners enable their success

Getting M&A deals right is an important capacity for many companies, as M&A activity this year is projected to surpass last year’s mammoth $3.4 trillion effort. Doing well on the M&A front, according to a McKinsey report, is correlated with M&A teams performing multiple evaluations for strategic options per year, going through the deal execution process quickly and having strong integration capabilities.  

M&A activity has been running red hot this year, with deal value announcements on track to surpass last year’s total of $3.4 trillion. Confidence that deal activity will continue also remains high, as recently reported by EY. Many companies are looking for ways in which they can expand inorganically as long-term growth incentives overcome shorter-term interests of stakeholders.

Yet not every company is equally adept at performing the end-to-end process of an M&A deal. To find out what sets top performers apart from their peers, McKinsey & Company, for its report ‘How M&A practitioners enable their success’, garnered 1,841 responses from C-level and senior executives. Respondents represented the full range of regions, industries, company sizes, and functional specialties. Of those surveyed, 85% say they are knowledgeable about their companies’ M&A activity and answered the full survey.

Setting a high performance
The researchers divided the respondents into high performers, those that met or surpassed targets for both cost and revenue synergies in their transactions of the past five years, and low performers, those that report that their companies have achieved neither the cost- nor the revenue-synergy targets in their transactions. The survey then explored what it is that the high performers are doing well compared to the low performers.

The survey highlights that high performers act differently than their low performing counterparts when it comes to how often they evaluate their portfolios for acquisition, joint-venture, and divestiture opportunities. In acquisitions for instance, almost 60% of high performers performed multiple checks per year for opportunities, compared to 36% of low performers. For joint ventures or alliances, 48% of high performers compared to 34% of low performers evaluate their strategic options more than once per year. In divestitures, high performers are more than twice as likely to do more than one evaluation per year.

It is not merely that high performing M&A teams are better at scouting for good opportunities, but when a good deal is found, they tend to be considerably faster at reaching a binding offer after the nondisclosure agreement is reached. Beyond month six only 15% of deals still need to be closed for high performers compared to more than 25% for low performers.

Strength areas
A final factor of note regarding difference between the companies is capabilities in four key M&A areas. The McKinsey analysis finds that high performing companies tend to be better at integrating their acquisitions than their low performing counterparts. 78% of high performers say they have specific capacities to integrate their targets, compared to 44% for low performers. High performers also have very strong capabilities in M&A operating model and organisation, at 84% compared to 56% for low performers.

Improving M&A performance
By classifying what both high and low performers believe they do well or very well internally, opportunities for improvement can be identified. The capacity to ‘understands the attributes that characterise a desirable­ target’ is done well or very well by high performers at 92% compared to lower performers at 68%. ‘Assigns the right people to develop targets’ is done well of very well marginally less often by high performers at 79%, while less than half (46%) of low performers feel they are doing this well.

Externally, both high and low performers are not strongly active. Half (49%) of high performing respondents say they ‘use compelling pitch materials to support even very-early-stage outreach discussions with targets’, while 46% say that they ‘regularly conducts ‘road shows’ or meetings to establish relationships with the most attractive targets’.

The consulting firm also notes that one way in which M&A teams can improve at both high performing and low performing companies is to reward those whose M&A related activity improves long term outcomes for the company. The authors remark: “For all their best practices and the strength of their capabilities, even the high performers have room to improve. When it comes to incentives, the results suggest that many companies focus on earn-outs and retention packages for key talent in acquired companies—but often overlook their own M&A teams. Because there are often different owners throughout a company’s M&A process, it can be particularly tricky to put proper incentives in place for each one. So, incentives must balance the promotion of post-integration success with the successful execution of an individual’s role.”