Traditionally, investors looking for consistent returns could reliably turn to consumer products companies to put their money to work. These companies had a formula for creating profitable growth: delight consumers with innovations, expand into exciting new international markets and add to their stables by buying up-and-coming new brands.
But something changed. Most consumer products companies recently have adopted the fashionable trend of stepping up share repurchases and dividends. According to a Bloomberg analysis in the autumn of 2014, S&P 500 companies were on track to spend 95% of their collective profits in 2014 on dividends and share buybacks, with consumer goods companies fully active.
The trouble is, this activity may help short-term earnings per share, but in the long term it does nothing to deliver above-average total shareholder returns (TSR), defined as stock price changes assuming reinvestment of cash dividends. Bain & Company analysis shows that growing operating earnings is the only way to spur long-term TSR. And the one thing that spurs operating earnings growth: systematic reinvestment into the business.
Like their counterparts in other industries, many consumer products companies now sit on record levels of cash, and investing in M&A happens to be a particularly attractive option for them. In Bain's study of 1,600 companies across all industries, we found that the rewards of M&A are greater for consumer products companies than for the average company. Consumer products companies that engaged in M&A from 2000 through 2010 generated average annual TSR of 7.4%, while the average for all companies was 4.8%. Our research also determined that the bigger and more frequent the deals, the better the long-term results. Large-scale and frequent acquirers outperform companies that occasionally engage in M&A or sit on the sidelines, achieving an average annual TSR of 9.5%.
Leading acquirers develop what we call Repeatable Models for M&A. They create a learning system that helps them build a unique, proprietary set of M&A skills and capabilities that are deeply rooted in their strategy and applied repeatedly to new deals. They sustain investment in their M&A capability, much as if they were building a marketing or manufacturing function from scratch.
These M&A leaders maintain a clear understanding of how M&A will support their growth strategy in alignment with their organic efforts, not only in where to play but also in how to win. They search hard for targets that will add to their operating profit, fuelling balanced growth. They pursue nearly as many "scope" deals as "scale" deals, moving into adjacent markets as well as expanding their share of existing markets.
And these companies create a deal thesis — developed and applied in the context of their overall strategy — and apply a unique value-creation plan that allows them to pay more but get better returns out of a deal than their competition.
For example, some acquirers focus on a proprietary way of optimising costs. Others may have a unique way to scale innovations. But it is always the same core capability in their organic strategy that they apply to M&A.
Successful acquirers also plan carefully for merger integration, determining what must be integrated and what can be kept separate, based on where they expect to create value. Finally, they mobilise to capture value, quickly nailing the shortlist of critical actions and effectively executing the much longer list of broader integration tasks.
Companies need to put five elements in place to build this kind of M&A capability:
A strong business development office at the centre, typically with close links to the strategy group, the chief executive and the board. The business development office should ensure a strong, ongoing connection between M&A and strategy, linking the company's accumulated deal-making experience to its core capabilities. It measures and tracks the results of each deal, creating an M&A-learning organisation.
Shared accountability for new business activity between the business units and corporate. Business units can come to corporate with ideas for deals, and business unit leaders should be tasked with identifying new M&A opportunities in their respective business lines. But each business unit must also own the process of managing the business.
A commitment to differentiated deal thesis and due diligence. Many companies don't start due diligence until they receive an offering memorandum from an investment bank. But there are benefits to developing a deal wish list based on the company's generic value-creation thesis and systematically assessing potential acquisitions before they are actively shopped.
Integration where it matters. Experienced acquirers understand the merger integration paradox: a few big things matter, but the details will kill you. Veteran acquirers invest to build a repeatable integration model, using the momentum of the integration to optimise the merged business in parallel with the integration. The integration process opens up the opportunity to implement a broad performance improvement agenda across the organisation. The best acquirers make integration a core competency, and it enables them to beat the M&A odds time after time.
Reliance on good change management principles. People create a big risk for any acquisition. They typically undergo an intense emotional cycle, with fear and uncertainty swinging abruptly to unbridled optimism and then back again to pessimism. Experienced acquirers understand this natural rhythm and manage the risks involved. Bain has developed a battle-tested Results Delivery® framework along 15 dimensions that makes change risks measurable, manageable and predictable.
As consumer goods companies plot paths for their futures, they know that nothing beats a mix of organic and inorganic growth. Companies that build Repeatable Models that systematically rely on — and reinforce — their unique capabilities will achieve the best results. Instead of using their cash to repurchase shares for short-term gains, they're reinvesting in the business to build companies that will grow and thrive for decades.
This article was written by Matthew Meacham, a partner in Bain & Co's London office, where he leads the global consumer products practice; Jean-Charles van den Branden, a partner in Brussels; David Harding, a Boston-based partner who co-leads Bain's global M&A practice, and Pankaj Saluja, a partner from the consumer products practice in Southeast Asia.