How alternative M&A strategies can help deliver strong returns

M&A using disruptive and innovative alternative strategies may help results versus classic mergers and acquisitions, our research shows.

In brief

• Alternative deal approaches appear to deliver better financial results compared to classic deal approaches in our study.
• Frequent, alternative M&A strategies can be a hallmark of agility and flexibility in the face of external headwinds.

The winners that have risen amid the business disruption of the last half decade appear to be the acquirers that have responded by turning to alternative deal approaches as a means to maintain competitive advantage and upgrade their capabilities.

We investigate why alternative M&A approaches can be effective and recommend operational levers to help companies improve M&A results. The M&A market can be defined by two strategic approaches: classic and alternative. While nearly all acquirers pursue a mix of these two approaches, we segmented acquirers by their preferred approach based on dealmaking frequency for our analysis. Alternative deal approaches can lead to greater value capture, can be effective hedges for companies in times of relentless disruption and may generate better outcomes compared to classic M&A.

• Classic: A classic deal approach encourages selective dealmaking and is commonly defined by landmark deals.
• Alternative: An alternative deal approach is characterized by a prolific M&A program that executes multiple deals per year.
• Infrequent: An infrequent deal approach is not active in M&A and executes fewer than one deal per year. Acquirers that take this approach serve as the control group of the analysis.

Our research shows that the last five years have seen valuation multiples and growth potential shift to acquirers leveraging alternative deal approaches that have the risk appetite and agility to sustain innovation. These acquirers are finding that frequent acquisitions can be more effective in capturing incremental value than occasional, capital-intensive or “big-bang” deals. This strategy also may allow the acquirer to maintain a flexible resource and capital position, which can be favorable when weathering external headwinds, such as geopolitical instability, government intervention and macroeconomic disruption.

We focused our analysis on the financial performance of approximately 800 publicly traded acquirers executing approximately 2,500 transactions, spending US$1.3t over the five-year period from 2015 to 2019. Acquirers were sampled from the technology, media and telecom (TMT) and consumer sectors due to the high levels of innovation and disruption in those sectors, as well as availability of transaction data.

For more on our research and how M&A using alternative strategies may be effective, download our PDF titled, “The road less taken: a case for alternative M&A.”

Financial results attributed to alternative dealmaking outperform classic

Alternative deal approaches appear to deliver better financial results across the board compared with classic deal approaches. Most notably, acquirers using alternative deal approaches appear to significantly outperform other companies on total shareholder return (TSR). We find that acquirers leveraging alternative deal approaches achieve nearly 1.5x the TSR of acquirers focused on classic approaches.

In our research, we found seven common themes that help explain why acquirers that pursue alternative strategies have driven financial performance relative to classic acquirers.

1. Innovating business models continuously
2. Investing in early-stage and high-growth targets
3. Creating valuable moats with startups
4. Applying a catch-and-compete approach
5. Balancing opportunity with timing
6. Demonstrating greater flexibility
7. Anchoring an ecosystem build-out

Executing an alternative M&A strategy

Realizing value from alternative M&A strategies may not be easy. Being successful across a diverse set of deals can require acquirers to commit to innovation, holistic value creation and robust infrastructure. Top-performing acquirers pursuing alternative strategies generally employ the following six operational levers to execute alternative strategies effectively.

1. Reshape portfolio frequently around core assets
2. Establish a robust corporate development function
3. Adopt a holistic value-driven lens
4. Prepare playbooks for all types of deal structures
   
5. Determine the right premium during diligence
6. Prioritize business model integration

An alternative deal approach can be an effective strategy for resiliency

M&A using alternative strategies can be an effective part of the corporate strategy toolkit to build resilient portfolios, create new growth opportunities and navigate the post-pandemic business world.

Successful alternative strategies consistently apply a holistic, value-driven lens to dealmaking. Alternative deal approaches tend to be highly focused on business model integration and top-line synergies, starting with the customer and the product. These strategies are often realized via well-equipped corporate development functions that can execute quickly and effectively through target selection, diligence and integration.

Alternative deal approaches in our analysis appear to be upending their classic peers. They not only show strong M&A results but also have likely become forces of disruption themselves.

Special thanks to Ash Panda, Isaac Hung, Rahul Bajaj and Ranjan Rath for being the primary contributors and coauthors of this work.