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The most profitable Growth Strategy

A recent long term study showed that companies that pursued a “programmatic” acquisition strategy created more ‘ownership value’ compared to peers with other growth strategies. This group clearly outperformed companies relaying in ‘organic growth’ among others. ‘Organic growth’ is the most risky strategy. Ablona has a proven track record and methods to help an acquirer in any situation.

The Analysis

The chart shows 'risk & reward' for different growth strategies. The data is based on a study 1) by McKinsey & Company how the top global 1000 non-banking companies, still existing by 2010, has performed during the previous ten years relative their industry peers. The success is measured for each company pursuing one of five strategies. The returns to shareholders are measured and compared to the relevant industry index giving "Median Excess Returns to Shareholders". The risk is measured via 95% confidence interval of this value. A wide interval indicates a high risk, a narrow interval indicates a low risk. The size of the bubbles indicates the number of companies having pursued the strategy.

The most common strategy is "Selective", meaning a small number of deals made but possibly a significant 'market cap' has been acquired. The "Tactical" strategy means many deals but with a low contribution to overall 'market cap'.

The "Programmatic" strategy means many deals and a high percentage of market cap acquired. Besides being the most successful strategy this was also the least risky strategy. It was the second most common strategy. The median outcome of the "Organic" strategy was reasonably good, however the most risky strategy due to the highest variation.

Another risky strategy and also the least value generating strategy is the ‘head-line generating’ strategy making one or a few “Large deals” (‘targets’ value > 30% of acquirers value). This is probably the reason there is a misconception that M&A activities are unprofitable and risky.

Assistance by Ablona

Ablona has to date participated in about 30 transactions. It’s a fact that in all these cases none has been a failure. On the contrary, most have been very successful! There is a handful examples where the full expected potential wasn’t realized within the expected time frame - but none close to a failure.

We believe this success partly depends on our specialization and knowledge but mostly on our proven process and analysis methods. About 1/3 of our M&A assignments has been to help the acquirer to proactively drive acquisitions.

Usually our new client engagement starts with mapping of gaps and opportunities and to help clarify a pragmatic acquisition strategy. We have also had assignments to make a '2:nd opinion' analysis of a possible acquisition as well as project leader and research capacity for 'due diligence' reports.

1) “Taking a longer-term look at M&A value creation”, McKinsey Quarterly January 2012

Update: Article originally published the 22nd of February, 2012. It has been reviewed and we also have found that these findings are also supported in another long term study by Bain & Company, "The renaissance in mergers and acquisitions: The surprising lessons of the 2000s".