Every time a company considers a merger or acquisition, it is betting on the future. And like any bet, there is an element of uncertainty, infused with hope. Chief financial officers are looking for ways to shorten the odds.
Programmatic M&A — meaning the practice of making several small- or medium-sized transactions that add up to a meaningful share of market capitalization (at least 15 percent) — is one such approach.
McKinsey's research of more than two decades of transactions has demonstrated that programmatic M&A gives companies a much better shot at generating above-average total shareholder returns (TSR), at lower risk, than any other strategy. It delivers positive returns in every sector of the economy studies and is better at riding out volatility. During the height of COVID-19, for example, programmatic M&A was the only strategy to deliver positive returns; selective M&A was flat, while organic and large deals were negative.
Our most recent analysis goes even further. Looking at 2,000 of the world’s biggest companies, we found those who made the most deals earned the highest returns. In addition, the programmatic M&A premium is growing, delivering 3.9% in excess TSR in the past decade, compared with 2.9% in the 2010s. In part, this is because practice makes, if not perfect, then at least competence. Companies with a programmatic strategy build strong M&A capabilities because they do deals regularly. In doing so, they build up expertise along all stages of the M&A process—from strategy and sourcing to due diligence to integration.
That is the principle, which is useful to know. Given today’s high interest rates, the advantages of programmatic M&A may be even greater, as some acquirers are put off by higher borrowing costs, and market valuations soften. But how can CFOs put this principle into practice?
1. Define Your Competitive Advantage
This may sound obvious, but the surprising thing is that it is often overlooked or underplayed. CFOs in companies that practice programmatic acquirers do not make that mistake. They are much more likely than their peers to believe that they understand the market environment and know what they need to do for their M&A strategy to contribute to their overall strategy. This self-knowledge is good in and of itself; it also enhances their resiliency — something that has proved to be essential to surviving, or even thriving, during economic downturns.
2. Set Metrics
The survey research shows that programmatic acquirers are most likely to set revenue, cost, and capital targets; budget and track related costs; and have performance measures, incentives, and governance processes in place. In a sense, this is no surprise, because the essence of the programmatic strategy is about being systematic. But it still matters. One result: programmatic acquirers are twice as likely to report actual integration costs that were at least 20 percent below what was budgeted—something that CFOs can take to the board to make the case.
3. Develop a Blueprint and Follow It With Conviction
Not any series of transactions will do. Rather, the deals are part of a systematic strategy that leaders have agreed to build new businesses and capabilities. In short, this isn’t about intuition, but understanding why, where, and how a deal makes sense. This is a dynamic process. The best results come when companies actively manage their portfolios and regularly reallocate capital. Just as important, by creating consensus about the business case for M&A, companies are positioned to stay the course, even if some deals fail, as will no doubt happen. Programmatic acquirers are always looking for deals, regardless of prevailing economic conditions.
4. Treat M&A as a Capability
The most effective acquirers constantly explore different economic scenarios and develop plans that enable them to adapt, even during downturns; they are almost twice as likely to have clear due diligence processes, for example. In a sense, programmatic M&A creates a virtuous circle: because these companies do deals regularly, they know how to do them well. For that to happen, the right people need to be in place. This can be tricky because there is a high risk of departure after an acquisition. So, it makes sense to identify key roles and individuals before the deal is closed and work to keep them on board. Our research shows that programmatic acquirers are more likely than peers to pay close attention to cultural factors during both diligence and integration processes. And of course, money can help, too. The research found that they are also much more likely to offer financial incentives to encourage employees to stay.
5. Be Ready to Sell as Well as Buy
Programmatic acquirers in the most recent survey were more likely than others to say their organizations have divested assets in the past five years. That is part of the reason that the most active companies were also the most successful. Selling can help companies focus on their core, get rid of bad buys, and generate capital for new acquisitions. All of this is central to the CFO’s role.
The evidence is clear. Programmatic M&A has worked in the past, is working now—and will likely continue to work in the future. But it cannot be assumed; it must be acted on. Most important of all, it must be seen as a continuing journey, not an event.
Patrick McCurdy is a partner in McKinsey & Company’s Boston office.