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Why the M&A success rate is on the rise

I often wonder whether the performance of M&A deals in general has improved over the last 20 years.

The conventional wisdom on all M&A, including the security industry, was that, up until the last 10 years or so, 70 per cent of all deals closed did not produce the returns that the buyers had initially wanted.

Various reasons have been cited for these bad results: the buyer did not have a clear idea of what they wanted and ended up buying the wrong company; the buyer simply paid too much for the deal; or the buyer failed to pay enough attention to the integration part of the deal after it closed. These are just some of the reasons.

I recently read an article written by David Harding, Dale Stafford and Suzanne Kumar of Bain and Company on “How companies got so good at M&A” which indicated that indeed the financial results from deals has improved over the last 20 years. Acquisitions in general have also increased in number. More and more companies are using M&A as an integral part of their strategy for growth.

The Bain and Company article tells us that buyers appear much more satisfied with the returns they are getting from acquisitions a higher percentage of the time. This is a big turn-around. How did this happen?

I am going to relate some of the points in the Bain article to what I have read elsewhere and actually experienced in my time in the security industry. It stands to reason that if we look at the security alarm industry in Canada, the bigger buyers would not continue to buy unless they were getting good results from deals.

What can we learn from the Bain article to help us understand how to improve the financial results on deals?

First, buyers that consistently do deals produce better results than those that don’t. I have also read this conclusion in other M&A books. My own experience with buyers is that those that do lots of deals are not only better and easier to deal with but also get better results. This is something that sellers should keep in mind: it is almost always easier doing a deal with a buyer who has done deals before.

Secondly, doing lots of smaller deals is usually safer and more financially rewarding to a buyer than doing one huge deal. Huge deals can be so much riskier and can consume more of the buyer’s time. They can also transform the buyer in a way that they did not want.

Another change I have seen is that more buyers today appear to have thought through why they are buying, what they want to buy specifically, and what they want to pay.

The reason why deals are being done has expanded as well. Up until recently, the main reason I see security industry buyers buying is that they wanted to build scale. We see this in all parts of the security industry. That is what is behind most of the deals done by the bigger Canadian buyers in the alarm industry.

Today more deals include what you could call “expanded scope.” A scope deal is one where the buyer is looking at you, the seller, because you provide an adjunct or new product or service to their existing business but in a slightly different field.

We see this with alarm companies that want to buy a small fire company to add to their alarm business, or a guard company looking to buy a commercial alarm business. The assumption behind many of these scope deals is that the new business is not only profitable but may add to the existing business. You could argue that scope deals can be a little riskier but they can also produce great returns.

Another reason why deals have improved is that buyers are paying more attention to their people and the people in the target company. Sometimes a buyer will buy mainly because they want the people working for the seller.

A smart buyer will look at a seller’s staff and see that certain members will fill gaps in their existing structure and are high performers. Often, one or two top notch performers can make a huge difference.

There are some other steps that buyers are taking that have improved their “batting average” on deals. For example, they are doing more due diligence on the culture of the company they are looking to buy. Also, the companies that I see with an acquisition team in place almost always end up doing a better job at acquiring than those without.

As I have made mention in previous articles, acquisitions can be destroyed by a bad integration. When you buy, you not only want to hold onto the sellers’ existing customers but set up the combined company to increase its customer base. Integration is everything.

The main point here is that over the years M&A activity has improved. More deals closing today produce successful returns.

Victor Harding is the principal of Harding Security Services (victor@hardingsecurity.ca).