SOURCE: The Boston Consulting Group

The Boston Consulting Group

August 31, 2012 00:01 ET

Companies That Actively Acquire and Divest Are Ideally Placed to Continually Add Value

Strategic M&A Provides Strong Returns by Emphasizing Ongoing Activities to Spin Off Businesses as Well as to Acquire, Boston Consulting Group Study Shows

BOSTON, MA--(Marketwire - Aug 31, 2012) - Companies that use M&A as a strategic tool -- regularly divesting operations as well as continually searching for new acquisition targets -- generally deliver superior shareholder returns, according to a new report by The Boston Consulting Group (BCG). The report, "Plant and Prune: How M&A Can Grow Portfolio Value," is being released today.

This year's M&A report -- BCG's eighth annual report spotlighting the most surprising aspects of M&A activity -- reveals insights that matter to dealmakers everywhere. In particular, it shows that although M&A is still very much a "fits and starts" business -- acquirers are seeing stunted returns and investors are staying on the sidelines for now -- the strategically prepared M&A leaders use these slow days to reevaluate each asset in their portfolios and do not hesitate to spin off assets that others consider more valuable.

Indeed, BCG's most recent analysis confirms that divestitures have much more potential to add value than is commonly believed. BCG's research shows that over the past two decades, the average selling company's earnings before interest and taxes increased by almost 7 percentage points from one year before a deal announcement to one year after.

For the first time, BCG is identifying the hallmarks of the most successful "portfolio rebuilders" -- that is, the companies that offload and add portfolio companies at the same time so that they maximize the value of their portfolios on an ongoing basis.

One of the most active dealmakers, a large German industrial conglomerate, has averaged almost three deals a month since 1990. In that time, the company has divested more than 250 businesses or divisions worth more than $25 billion in total, while making more than 400 acquisitions valued collectively at more than $40 billion. Active portfolio optimization is one factor that has helped the conglomerate outperform the broad stock indexes since the late 1990s. Since 1996, the company has clocked up annual total shareholder returns (TSR) of 8.6 percent, compared with 6.5 percent for the S&P 500.

Other companies doing smaller deals can demonstrate even more impressive TSR numbers. One South Korean conglomerate with a history of selling and buying businesses has shown an average TSR of 23 percent since 1990. In the U.S., a medical-technology company recently sold one product line and bought four businesses. Its TSR has averaged 17 percent over the past dozen years. And a global software giant with a series of recent acquisitions and divestments under its belt recorded a TSR of 20 percent from 1990 through 2011.

"We've found that investors recognize and reward companies that can demonstrate a planned sequence for portfolio streamlining and restructuring; the faster a company executes its divestment after the announcement, the greater the benefits," said Jens Kengelbach, a member of BCG's global M&A team and a coauthor of the report.

Specifically, BCG's research shows that the average one-year shareholder return on deals closed within two months of the announcement is 4 percentage points higher than the returns on deals still open after 12 months. Put another way: fast resolution dispels investors' uncertainty.

Furthermore, BCG's analysis of divestiture returns indicates that both sides benefit when companies or business units are spun off. The average short-term cumulative abnormal returns (CAR) for acquirers of divested assets over the past two decades is 2.1 percent, and 58 percent of such deals created positive value for the new shareholders. That's far higher than the 0.7 percent CAR for nondivestment deals or even negative 0.8 percent for buying public companies. For the shareholders of the selling company, the short-term CAR average was lower, but still significant, at 1.3 percent; some 54 percent of divestment deals created value for the seller.

Traits of Successful Divestors

BCG's study pinpoints key characteristics of successful divestors. They are careful to tamp down the emotion: they decide objectively and make sure their decisions are in sync with the company's strategy. They are guided by facts about the value of the spin-off business to the parent business compared with its value to others, for instance. They also know the value of what's for sale: they are clear about the factors that will really drive value for the divestment candidate's acquirers.

Successful divestors also tell great stories. They know that the facts are crucial, but a compelling, customized narrative is what gets buyers excited. And they set up "command centers," ensuring that their divestitures are run systematically through a dedicated divestiture project office. Such an office helps to ensure that the deal does not distract senior management from the day-to-day running of the business.

Asia Asserts Itself on the Dealmaking Stage

The two-decade growth in the number of acquisitions worldwide by companies from the Asia-Pacific region did not gear down much in 2011. Although overall M&A activity in 2011 was still dominated by Western companies -- Asian buyers were involved in about 14 percent of the deals, accounting for about 15 percent of the global total -- their impact is growing.

"Dynamic Asian companies with growing appetites for M&A aren't just snapping up targets in emerging markets," said Alexander Roos, a BCG partner and a coauthor of the report. "While Asian challengers have been growing rich with cash and more sophisticated, they've been looking at the established U.S. and European markets. They're moving up the value chain to acquire technology, natural resources, brands, and other valuable assets."

In the past decade, the number of Asia-to-established-market deals rose by a 6 percent compound annual growth rate, while the deal value rose even faster -- 11 percent per year. For comparison, Asia-to-nonestablished-market deals grew at just 4 percent annually.

Indian companies have been expanding their share of Asia-to-established-market deals over the past decade. In one telling example, an automotive company paid more than $2 billion for auto marques from a British company.

Yet the power is shifting: the Chinese Dragon has begun to overtake the Indian tiger. Chinese companies have been very aggressively pursuing outbound transactions in North America and Europe since 2007. China's share of Asia-to-established-market deals was 15 percent from 2006 through 2011, up from 11 percent from 2001 through 2005. 

Behind China's assertive moves lie crucial factors that business leaders in the rest of the world must not ignore. China's Twelfth Five-Year Plan -- the national government's official economic policy -- calls for the development of seven strategic industries: energy savings and environmental protection, new information technology, biotechnology, high-end equipment manufacturing, new and renewable energy, new materials, and new-energy vehicles. The government has said that the value-added output of these industries will increase to 15 percent of China's GDP by 2020.

Necessary Perspective: M&A as A Strategic Tool for Buoying Value

BCG's 2012 M&A report concludes by urging business leaders not to let uncertainty about a rebound in dealmaking deter them from viewing M&A as a truly strategic tool for buoying shareholder value.

These are the days for coolly reevaluating every asset in the corporate portfolio -- each in light of its long-term value to shareholders as opposed to its value to other investors. And these are the best times to be looking for acquisition opportunities that, when properly integrated, will add significant value over the long haul. Furthermore, quieter times like these are the very best times to fine-tune and lubricate the organization's dealmaking machinery.

A copy of the report can be downloaded at www.bcgperspectives.com.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.

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