In order for the value of a company to increase,
earnings must grow. Earnings growth can occur organically through
internal growth or externally through mergers and acquisitions.
Acquisitions can be a very successful way of increasing shareholder
value, especially when executed with a value investment approach.
McKinsey & Company published a study of 1,000 mainly industrial
US companies over a roughly two-decade period ending in 1999.
Of particular note was that this epoch included the US recession
of 1990 to 1991.
The study divided the acquiring companies into
market leaders which remained market leaders (in the top quartile
of their industries), and market challengers which became market
leaders by moving into the top quartile. Success for these companies
came in part because both classes of companies continued to make
investments in acquisitions through thick and thin. The then-current
market leaders made smaller, tactical acquisitions for market
consolidation; successful challengers made larger, strategic acquisitions
for market position. Investors rewarded both classes of companies.
By the end of the 1990 to 1991 recession, market leaders increased
their market-to-book premium by 38 percent when compared to peers.
Market challengers increased their premium by 25 percent.
Successful acquisitions are based on thoughtful
strategies and careful execution. Smart acquirers will first figure
out how acquisitions will serve their longer-term strategies on
a risk-adjusted basis. These companies develop plans that key
off the stage of growth of their markets - emerging, developing
or mature - and look at acquisitions as a rapid path to achieve
their strategic goals. For example, in the services industry,
we see fast food restaurants, with growth stifled by a mature
market expanding at only 4 percent, strategically targeting specialty
casual eateries occupying a niche growing at 21 percent. In 1998
#1 McDonald's ingested the 180-store Chipolte Mexican Grill, and
in April 2002 it partnered with an Italian specialty chain, Fazoli's.
In May 2002 #3 Wendy's purchased the 169-store Baja Fresh Mexican
Grill. Both companies saw these acquisitions as a way to meet
their strategic goals of growing revenue, following the market,
providing good economic returns to stakeholders, and enhancing
their brand images with such trendy attributes as freshness and
Secondly, successful companies remove risk by
making transactions almost routine. In the high technology segment,
where rapid change is a way of life, top companies - those averaging
more than 39 percent annual growth in total return to shareholders
since 1989 - undertake almost twice as many acquisitions as do
their competitors. In these companies, a few capable executives,
usually the CFO and CEO, drive acquisition activities. These companies
also know that the devil is in the details of assessing target
companies, deal structuring, and especially integrating the acquired
operations to get acquisition synergies. Effort is focused on
retaining key people, ensuring that R&D and product shipments
do not fall behind, and preventing sales cultures from clashing.
So the devilish details are managed by experienced professionals,
and the process normally transpires largely free of unpleasant
The process from a buyer's point of view is as