Active M&A ‘portfolio masters’ outperform, study finds

September 16, 2016

MONEY SHEET OF 100 DOLLAR BILLS IS SHOWNCompanies that engage in regular acquisition and divestiture of businesses as part of their corporate strategy, known as “portfolio masters,” consistently outperform less active dealmakers in terms of shareholder return, according to a recent consulting firm study.

The Boston Consulting Group’s 2016 M&A Report, called “Masters of the Corporate Portfolio,” found that 2015 was a record year for global mergers and acquisitions because markets see them as one of the few available avenues to grow value.

The BCG report, prepared in cooperation with Paderborn University, compares three types of dealmakers using the consulting firm’s proprietary database of more than 54,000 M&A transactions since 1990.

The three types of dealmakers are portfolio masters, or companies that use active portfolio management via M&A to boost shareholder return, “strategic shifters,” or companies that frequently rebalance their portfolios through M&A, and “one-timers.”

According to BCG, portfolio masters are distinguished by their willingness to invest large amounts of leadership time, money, and organizational focus in support of their M&A strategy in advance of any particular deal.

BCG posits other companies can emulate the four key characteristics of portfolio masters.

First, portfolio masters are bold in that they are willing to pay higher multiples for the right deals. The study revealed portfolio masters pay a multiple of almost 12 times “earnings before interest, taxation, depreciation and amortization,” or EBITDA, for the right quality asset and do more of their deals purely in cash, as cash deals generally require a smaller premium than those involving stock.

Second, portfolio masters pay for growth over margin, buying high growth firms and selling divisions that do not deliver on growth targets, temporarily diluting their margins with the confidence they can improve combined margins over time.

Third, portfolio masters do not worry about the market, as they are most active during periods of low growth and high volatility, taking advantage of lower competition and generating positive excess returns across all market cycles.

Portfolio masters are motivated far more by strategic rationale than circumstantial incentives, according to the study.

Fourth, portfolio masters move fast, closing transactions quickly in order to get an earlier carve-out execution, where much of the value in M&A is realized.

The BCG study determined that companies can increase their returns for shareholders by moving up the M&A ladder, from one-timer or strategic shifter to portfolio master.

The study specifically examined the pharmaceutical company Actavis that became Allergan through a $71 billion acquisition in 2015.

Since 2001, the company increased its deal activity over the course of three successive five-year periods — starting with one transaction (2001 through 2005), followed by three transactions (2006 through 2010), and then 15 buy- and sell-side transactions (2011 through 2015).

Over the same time period, Actavus/Allergan improved average annual shareholder return from 9 percent to 43 percent

Jens Kengelbach, BCG’s global head of M&A and coauthor of the report, stated that companies “that approach dealmaking as an industrial process create an advantage for their shareholders.”

The BCG report warns that when management does not hone their M&A skills and deploy such skills on a continuing basis, the company is unable to effectively use a powerful shareholder value creating tool.