Beat the Odds in M&A Turnarounds

As long-term growth rates trend downward in many economies, business leaders are turning to acquisitions to fuel growth. Turnarounds are becoming imperative as well. Companies face a seemingly endless stream of disruptions from new technology, emerging competitors, shifts in consumer behavior, regulatory changes, slowing economic growth, and other threats, any of which can hurt performance and require substantial and prompt changes in operations and strategy. However, most M&A deals fail to create value, and only about one in four turnaround programs leads to long-term improvements in performance. Although M&A deals and turnarounds are individually hard to pull off, combining the two can be even more challenging. Yet based on an analysis of roughly 1,400 M&A-based turnarounds between 2005 and 2018, the authors have identified six factors (all within the control of management) that can help acquiring companies improve their odds of success: high investment in R&D, a long-term orientation, a well-defined purpose, sufficient investment in transformation, ambitious synergy targets, and a willingness to act quickly. While these six factors can improve post-deal performance on their own, combining them is even more powerful. Indeed, there is a direct relationship between the number of success factors deployed and three-year TSR (total shareholder return) performance. Turnaround acquisitions have a high failure rate. But those that succeed bring considerable rewards. This group of winners generates gains in both revenue growth and profit margins, as well as significantly better returns.