Behind the Deal: Uncovering the secrets of successful Merger and Acquisition transactions in 2024

M&A is a high-stakes game, and the landscape is littered with failures. But those who succeed yield far higher returns than those relying on organic growth alone – and the advantage gap seems to be widening.

Between 2000 and 2010, companies that were frequent acquirers achieved 57% higher shareholder returns compared to those that refrained from acquisitions. As of 2024, that advantage is about 130%. 

In this article, Hilton Smythe will be looking at the secrets behind successful M&A transactions in 2024 – from narrowing in on “scope” targets through to due diligence on steroids.

What makes a successful M&A transaction in 2024?

Moving from scale to scope 

In the early-to-mid noughties, most deals centred on expanding core business operations. However, a few forward-thinking companies like Cisco Systems and Apple in the US thrived by acquiring essential capabilities and entering new markets. The result? A shift in focus from scale to scope with more companies seeking to acquire disruptive technologies, complete value chain buildouts, and reach new customers. 

This trend continues to be seen in the most successful buy-sell transactions today. In July, we had Carlsberg acquiring non-alcoholic drinks powerhouse Britvic for £3.3bn, diversifying its product portfolio as consumer preferences shift away from beer towards spirits, canned cocktails, hard seltzers, and zero-alcohol brews.

There’s also been a wave of financial services companies investing in fintech start-ups seeking to remain abreast of emerging tech. Banks, in particular, have turned their attention from snapping up investment firms and smaller banks to shelling out the big bucks for innovative fintech start-ups.

The trend extends to SME and mid-market dealmaking as well. Digital marketing companies, for example, are creating massive value through acquiring agencies with niche specialisms, such as influencer marketing, Web3 and e-commerce, while civil engineering firms are finding ways to expand into growing categories, such as battery energy storage systems, wind power, hydro power, substation construction and grid reinforcement.  

“More companies are seeking to acquire disruptive technologies, complete value chain buildouts, and reach new customers, rather than simply expanding core business operations.”

A “programmatic” M&A strategy

An empirical study by McKinsey, analysing over two decades of data, reaffirms the superior value creation potential of “programmatic” M&A strategies.

What’s programmatic M&A? It’s a strategy characterised by orchestrating a series of strategic acquisitions organised around a specific M&A theme, and it has been shown to consistently outperform alternative strategies in terms of both performance and risk mitigation.

For transport & logistics companies, winning M&A themes might include pursuing service portfolio expansion, acquiring technologies that improve supply chain management, or snapping up floundering victims of the 2023 downturn.

For precision engineering companies, winning M&A themes might include developing end-to-end manufacturing solutions by acquiring machining firms with different specialisms, or acquiring overseas competitors in markets with high barriers to entry.  

“Programmatic M&A has been shown to consistently outperform alternative strategies in terms of both performance and risk mitigation.”

Building and maintaining trust

Ants can quickly be magnified into elephants in the high-stakes environment of M&A transactions. Scepticism prevails on both sides: buyers worry that they’re overpaying, that there has been some “creative accounting”, or that there are well-disguised problems with the business. Sellers worry that buyers will capitalise on small snag-points to radically alter the terms of the team or drag their feet.  

Complete transparency on both sides is key. Sellers must ensure their marketing materials and documentation—including financial and legal —are organised and well-substantiated. Buyers should transparently communicate their acquisition strategy, their availability of funds, and intended timeline for deal completion.

Importantly, sellers should not try to hide issues. It’ll look bad if something arises during due diligence, and even worse if it arises after a deal is closed – as happened during the now infamous HP-Autonomy deal. 

Many transactions also involve post-closing elements such as earn-outs, seller financing, and continued owner engagement. While legal agreements should delineate each party’s obligations, they will nevertheless be compromised if the working relationship breaks down during negotiations.

“Ants can quickly be magnified into elephants in the high-stakes environment of M&A transactions.”

Due diligence on steroids

Due diligence has changed dramatically in recent times. Previously a financial modelling and audit exercise (yawn), it is now far more wide-ranging, encompassing talent and culture assessments, setting synergy benchmarks, an assessment of the market, and pre-integration planning.

This far more holistic approach is essential to identifying and understanding opportunities for value creation (and the risks of value destruction).

For example, operational due diligence has evolved from a straightforward assessment of asset quality (that is, an evaluation of the recoverability value of the assets) through to a more expansive approach, considering how assets will be integrated to create value.

And, in the early noughties, it would have been quite unusual to conduct a cultural assessment. “Now,” one management consultancy says, “it underpins every successful deal.” It may involve a good scour of the company’s digital presence and in-depth conversations with senior management. Savvy private equity firms are even turning to tools like social media scraping, mining e-commerce traffic, and conducting sentiment analysis on TripAdvisor reviews.  

“Previously a financial modelling and audit exercise, due diligence is now far more wide-ranging, encompassing talent and culture assessments, setting synergy benchmarks, an assessment of the market, and pre-integration planning.”

Highly sophisticated integration

Few understand how to identify targets that could transform a company or how much to pay for them, and fewer still, how to integrate them.

Indeed, widely recognised as a common reason for M&A failures, integration efforts have become highly sophisticated amongst successful dealmakers. They will usually formulate an integration plan, outlining synergy priorities, targets and KPIs, action plans, risk mitigation, and a way of tracking progress.

Performance metrics are particularly important: a 2017 survey by PwC found that among dealmakers who achieve their synergy expectations, using KPIs is slightly more common: 72% of top performers and 60% of low performers apply KPIs in order to measure synergy realisation.

KPIs may be financial metrics, such as cost savings and revenue growth, operational metrics such as productivity improvements, or strategic metrics such as market share gains or innovation capabilities.

As for integration risks, these might include disruption to “Business-As-Usual”, culture clashes, uncertainty for staff, and technology integration problems. Mitigating them might involve:

• Identifying key client accounts and relationships to maintain.
• Determining communication strategies with staff and key stakeholders.
• Deciding on the best technology stack for the newly formed entity.
• Establishing where training gaps amongst staff exist.

Few understand how to identify targets that could transform a company or how much to pay for them, and fewer still, how to integrate them.

Thinking about your buy-and-build strategy?