bcg report - grwoth thru acquisitions

Growing Through Acquisitions

The Successful Value Creation Record of Acquisitive Growth Strategies

BCG REPORT

The Boston Consulting Group is a general management consulting firmthat is a global leader in business strategy. BCG has helped companiesin every major industry and market achieve a competitive advantage bydeveloping and implementing winning strategies. Founded in 1963, thefirm now operates 60 offices in 37 countries. For further information,please visit our Web site at www.bcg.com.

Growing Through Acquisitions

KEES COOLS

KERMIT KING

CHRIS NEENAN

MIKI TSUSAKA

M A Y 2 0 0 4

www.bcg.com

The Successful Value Creation Record of Acquisitive Growth Strategies

The Boston Consulting Group, Inc. 2004. All rights reserved.

For information or permission to reprint, please contact BCG at:E-mail: [email protected]: 1 617 973 1339, attention IMC/PermissionsMail: IMC/Permissions

The Boston Consulting Group, Inc.Exchange PlaceBoston, MA 02109USA

2 BCG REPORT

3Growing Through Acquisitions

Table of Contents

About This Report 4

For Further Contact 5

Executive Summary 6

Acquisitive Growth and Value Creation 8

Strategies for Acquisitive Growth 14Reducing Costs Relative to Competitors 14

Acquiring Necessary Capabilities 14

Building a New Business Model 15

Becoming a Successful Acquirer 16Linking M&A to Growth Strategy 16

Implementing High-Definition Valuation 18

Realizing Value Through Effective Postmerger Integration 20

Conclusion 23

About This Report

4 BCG REPORT

This research report is a product of the Corporate Finance and Strategy practice of The Boston ConsultingGroup. Kees Cools is an executive adviser in the firms Amsterdam office and global leader of the practicesmarketing and research activities. Kermit King is a vice president and director in the firms Chicago office.Chris Neenan is a former vice president and director in the firms New York office. Miki Tsusaka is a seniorvice president and director in the New York office and global leader of the firms postmerger integrationpractice.

AcknowledgmentsThe authors would like to thank Brett Schiedermayer of the BCG ValueScience Center and their former BCGcolleague Mark Sirower, who worked on the research project described in these pages and made valuablecontributions to the final report. They would also like to acknowledge the additional research assistance ofHans le Grand, a corporate-finance topic specialist based in the firms Amsterdam office.

In addition, the authors would like to thank their colleagues George Stalk Jr. and Rob Lachenauer for theuse of material from their book Hardball: Are You Playing to Play or Playing to Win? (Harvard Business SchoolPress, forthcoming in fall 2004).

Finally, the authors would like to acknowledge the contributions of BCGs global experts in corporatefinance and strategy:

Brad Banducci, a vice president and director in BCGs Sydney office and leader of the firms CorporateFinance and Strategy practice in Asia-Pacific

Gerry Hansell, a vice president and director in BCGs Chicago office and leader of the firms CorporateFinance and Strategy practice in the Americas

Mark Joiner, a senior vice president and director in BCGs New York office and global leader of the firmsM&A practice

Immo Rupf, a vice president and director in BCGs Paris office and leader of the firms Corporate Financeand Strategy practice in Europe

Daniel Stelter, a vice president and director in BCGs Berlin office and global leader of the firms CorporateFinance and Strategy practice

To Contact the BCG Authors The authors welcome your questions and feedback.

Kees CoolsThe Boston Consulting Group, Inc.J. F. Kennedylaan 1003741 EH BaarnNetherlandsTelephone: 31 35 548 6800E-mail: [email protected]

Kermit KingThe Boston Consulting Group, Inc.200 South Wacker DriveChicago, IL 60606USATelephone: 1 312 993 3300E-mail: [email protected]

Miki TsusakaThe Boston Consulting Group, Inc.430 Park AvenueNew York, NY 10022USATelephone: 1 212 446 2800E-mail: [email protected]

For Further Contact

The Corporate Finance and Strategy practice of The Boston Consulting Group is a global network of expertshelping clients design, implement, and maintain superior strategies for long-term value creation. The prac-tice works in close cooperation with BCGs industry experts and employs a variety of state-of-the-art method-ologies in portfolio management, value management, M&A, and postmerger integration. For further infor-mation, please contact the individuals listed below.


The Americas

Alan Wise BCG Atlanta1 404 877 [email protected]

Stuart Grief BCG Boston1 617 973 [email protected]

Gerry Hansell BCG Chicago1 312 993 [email protected]

Eric OlsenBCG Chicago1 312 993 [email protected]

J PuckettBCG Dallas1 214 849 [email protected]

Balu BalagopalBCG Houston1 713 286 [email protected]

Mark Joiner BCG New York1 212 446 [email protected]

Jeffrey KotzenBCG New York1 212 446 [email protected]

Rohit BhagatBCG San Francisco1 415 732 [email protected]

Walter PiacsekBCG So Paulo55 11 3046 [email protected]

Peter Stanger BCG Toronto1 416 955 [email protected]

Robert Hutchinson BCG Washington1 301 664 [email protected]

Europe

Daniel StelterBCG Berlin49 30 28 87 [email protected]

Yvan JansenBCG Brussels32 2 289 02 [email protected]

Lars FsteBCG Copenhagen45 77 32 34 [email protected]

Pascal Xhonneux BCG Dsseldorf49 2 11 30 11 [email protected]

Neil MonneryBCG London44 20 7753 [email protected]

Juan Gonzlez BCG Madrid34 91 520 61 [email protected]

Tommaso Barracco BCG Milan39 0265 [email protected]

Stephan DertnigBCG Moscow7 095 258 [email protected]

Immo Rupf BCG Paris33 1 40 17 10 [email protected]

Per Hallius BCG Stockholm46 8 402 44 [email protected]

Victor AerniBCG Zrich41 1 388 86 [email protected]

Asia-Pacific

Nicholas Glenning BCG Melbourne61 3 9656 [email protected]

Janmejaya SinhaBCG Mumbai91 22 2283 [email protected]

Byung Nam Rhee BCG Seoul822 399 [email protected]

Jean Lebreton BCG Shanghai86 21 6375 [email protected]

Roman ScottBCG Singapore65 6429 [email protected]

Brad BanducciBCG Sydney61 2 9323 [email protected]

Naoki ShigetakeBCG Tokyo81 3 5211 [email protected]

Executive Summary

6 BCG REPORT

Recent improvements in the world economy haveput growth back on the agenda at many companies.Its about time. Growth is a well-understood driverof shareholder returns. When combined with highreturns on capital, it can create substantial value forshareholders.

And yet, despite improved economic conditions,many companies are finding it difficult to satisfytheir growth aspirations through organic growthalone. In the past, they might have looked to acqui-sitions as an alternative pathway to growth. Buttoday, many executives, board members, and in-vestors view mergers and acquisitions (M&A) withskepticism. They have seen too many research stud-ies showing that most mergersas many as two-thirdsfail to create value for the acquirers share-holders. And they are wary of the excesses of thelate-1990s, when too many companies used acquisi-tions as a quick but ultimately unsustainablemethod of boosting earnings and multiples.

This skepticism is unwarranted. New research byThe Boston Consulting Group demonstrates that,contrary to academic opinion and the recent publicrecord of acquisitions, acquisitive growth strategiescreate superior shareholder returns. We analyzedthe long-term stock-market performance of morethan 700 large public U.S. companies over a ten-yearperiod ending in 2002, separating them into threegroups based on their level of M&A activity. Ourstudy produced five key findings:

The highly acquisitive companies in our samplehad the highest median total shareholder return(TSR)more than a full percentage point peryear greater than the median TSR of companiesthat made few or no acquisitions. This perform-ance translated into a 29 percent higher returnover the full ten years of our study.

Although some individual companies have gener-ated extraordinary shareholder value throughorganic growth alone, on average, the most suc-

cessful acquisitive growers also outperformed themost successful organic growers.

This superior performance was not due to higherprofitability but rather to the acquisitive growthitself. The fastest-growing acquisitive companiesin our sample had only average profitability, whilecarrying relatively higher levels of debt and deliv-ering below-average dividendsall signs thatinvestors are rewarding them for the value cre-ated by the acquisitions themselves.

Our study also confirmed some basic precepts ofvalue management. The most successful highlyacquisitive companies did not try to grow theirway out of their problems by pursuing growth atreturns below the cost of capital. Rather, theymade sure that they were delivering cash-flowreturn on investment (CFROI) above the cost ofcapital before they grew their assets.

Finally, the most successful companies in our sam-ple combined above-average revenue growth withhigh CFROI no matter what kind of growth strat-egy they pursued. But the highly acquisitive com-panies grew at nearly twice the rate of the organiccompanies and gained market share more rapidly.

Our research makes clear that there is no inherentdisadvantage to growth by acquisition. On the con-trary, under the right circumstances it can be thebest way to generate value-creating growth (that is,growth above the cost of capital). But that doesntmean that companies should pursue acquisitivegrowth under any and all circumstances.

Successful acquirers choose acquisitive growthonly when it is an inherent part of their strategyand they are confident they can use it to createsustainable competitive advantage and so deliverabove-average returns.

They develop a detailed understanding of therole of M&A in achieving their growth strategyfar in advance of bidding on any particular deal.

They are unusually rigorous when it comes tovaluing and pricing potential deals, an approachwe call high-definition valuation.

They pay at least as much attention to the detailsof postmerger integration (PMI) as they do to thedeal itself and work hard to strike a balance betweenspeed and thoroughness in the PMI process.

This report lays out the findings of the BCG acquis-itive-growth study. It also draws on BCGs extensivepractical experienceadvising companies on morethan 2,000 M&A projects over the past ten yearstoidentify the critical factors for M&A success. Thereport is divided into three parts:

Acquisitive Growth and Value Creation presentsthe basic findings of our research and describeswhy and how our study differs from most recentM&A studies.

Strategies for Acquisitive Growth describesthree common strategies for creating competitiveadvantage through acquisition.

Becoming a Successful Acquirer explains howcompanies can make M&A an integral part oftheir growth strategies, arrive at realistic pricingguidelines for individual transactions, and com-bine speed and thoroughness in the postmergerintegration process.


Our study examined the stock-market performanceof 705 public U.S. companies for the ten-yearperiod from 1993 to 2002.1 We used each companysten-year total shareholder return (TSR) as thebenchmark performance measure. The samplecompanies, representing a combined 2002 marketcapitalization of $6.5 trillion, had a median annualTSR of 10 percent.

Since we were interested in how the market valuesdifferent styles of long-term growth, we separatedthe companies into three categories based on theirlevel of merger and acquisition (M&A) activity. Thefirst category consists of companies that madeacquisitions in five or more of the years under studyand spent an amount on these acquisitions equiva-lent to 70 percent or more of their 2002 marketcapitalization. These companies pursued what weterm a highly acquisitive growth strategy. Of the 705companies in our study, 148 are in this category.

The second category consists of companies thatmade acquisitions in only one year of the study (ormade no acquisitions at all) and spent 5 percent orless of their 2002 market capitalization. These com-panies employed an organic growth strategy. Thereare 108 companies in this category.

The third category is made up of the remaining 449companies in our sample. Neither highly acquisitivenor organic, they pursued a mixed growth strategy.(For a comparison of our research design with thatof other studies of merger performance, see theinsert How Our Study Is Different on page 11.)

Exhibit 1 compares total shareholder return for thethree different growth strategies. The exhibit showsboth the median TSR for each group (illustrated bythe large dot) and the range of average annual

returns for the middle three quintiles (illustrated bythe shaded bars).2 As Exhibit 1 demonstrates, themedian TSR for the highly acquisitive segment (10.8percent) is more than a full percentage point greaterthan for companies pursuing an organic strategy (9.6percent) and nearly one point greater than for com-panies with mixed strategies (9.9 percent).

Exhibit 1 also shows a wide variation of returnswithin each group. The larger relative size of thequintile bands for companies pursuing a highlyacquisitive strategy (reflecting a greater variation inreturns) is an indication of the inherent risks asso-ciated with acquisitions. To understand the sourcesof this differentiation, we further segmented eachcategory into fast growers (above the median rate ofrevenue growth for the category) and slow growers(below the median for the category). Exhibit 2shows that, on average, the high-growth companiesin each category produced higher market returns,

Acquisitive Growth and Value Creation

8 BCG REPORT

1. The study includes all publicly traded U.S. companies with 2002 mar-ket capitalizations exceeding $500 million. Banks, financial institutions,and companies with incomplete data were excluded.

2. Because of the wide extremes in minimum and maximum returns, wereport medianas opposed to averageTSR and exclude the top andbottom quintiles.

E X H I B I T 1

THE IMPACT OF GROWTH STRATEGY ON STOCK MARKET PERFORMANCE, 19932002Highly Acquisitive Companies Produce the Best Returns

SOURCES: Compustat; BCG analysis.

NOTE: Top and bottom quintiles excluded because of extreme values.

0

5

10

15

20

25

2nd quintile

Average annual TSR(%)

Organic strategy

n = 108

Mixedstrategy

n = 449

3rd quintile 4th quintile Median

Highly acquisitive

strategy

n = 148

9.6 10.89.9

no matter what type of strategy yielded the growth.Across the three growth strategies in our study, thefast growers outperformed the slow growers byroughly 6 to 7 percentage points. The fact that themedian return for the highly acquisitive high-growth companies (14.7 percent) is greater thanthat of all the other companies in the sample isanother indication that the stock market rewardslong-term growth strategies that include a signifi-cant number of acquisitions.

Another clear finding in Exhibit 2 is that in order toproduce roughly the same shareholder return, fast-growing acquisitive companies needed to grownearly twice as fast as fast-growing organic compa-nies (an average annual growth rate of 29.7 percentversus one of 17.3 percent). This is not surprisinggiven that a significant part of the value creationresulting from acquisitions will be captured by anacquired companys shareholders in the form of theacquisition premium paid by the buyer.

We did additional analysis of the 74 companies inthe highly acquisitive high-growth segment to testwhether their superior performance was indeeddue to the acquisitions they were making and not toother factors. Three pieces of evidence stand out.

First, there is no industry bias in this segment. Inother words, these companies are not clustered inhigh-growth industries and simply riding a wave ofrapid industry expansion.

Second, the profitability of these companiesmeas-ured by cash-flow return on investment (CFROI)above the weighted average cost of capitalwasabout equal to that of the rest of the companies inthe sample. So it was not high profitability or excesscash that drove these companies acquisitions orgenerated their above-average TSR. Therefore, it ismost likely that their above-average TSR was indeeda product of their extraordinary acquisitive growth.

But if these companies had only average profitabil-ity, how did they fund their acquisitions? Through a

combination of below-average dividends and above-average debt. (See Exhibit 3, page 10.) Typically,low dividends and high leverage decrease a com-panys stock-market returns.3 For these high-growth, highly acquisitive companies, however, thiswas not the case. As Exhibit 2 shows, the medianTSR of these companies is above average for thesample as a whole and even higher than that of thefast-growing companies pursuing organic or mixedgrowth strategies. Apparently, the value created byacquisitive growth outweighs the disadvantages oflow dividends and high leverage. Whats more, thefact that their median beta (a standard measure ofrisk in corporate finance) is only slightly greaterthan that of the sample as a whole (0.97 versus0.90) suggests that these companies were especiallygood at managing the extra risk that growth byacquisition typically involves.

Third, there are indications that these highlyacquisitive high-growth companies did relatively


3. See Andy Naranjo, M. Nimalendran, and Mike Ryngaert, Stock Returns,Dividend Yields, and Taxes, Journal of Finance 53, no. 6 (December1998), pp. 20292057.

E X H I B I T 2

THE IMPACT OF GROWTH STRATEGY AND GROWTH RATE ON STOCK MARKET PERFORMANCE, 19932002On Average, Highly Acquisitive High-Growth Companies Outperform All Others



0

5

10

15

20

25

30

Organiclow

growth

n = 54

3.9%

Organic high

growth

n = 54

17.3%

Mixedlow

growth

n = 224

3.3%

14.7

7.6

13.8

7.1

13.3

7.1

Mixedhigh

growth

n = 225

18.1%

Highly acquisitive

lowgrowth

n = 74

7.5%

Highly acquisitive

highgrowth

n = 74

29.7%

2nd quintile 3rd quintile 4th quintile Median

Average annualgrowth rate:

AverageannualTSR(%)

better in individual transactions. We analyzed theannouncement effects for all the acquisitions inour sample with a relative size greater than 5 per-cent of the acquiring companys market capitaliza-tion at the time of the transaction. Our studyconfirms the common research finding that ac-quisitions of public targets have, on average,slightly negative announcement effects. In otherwords, the average public acquisition does notcreate value for the acquirers shareholders in theshort term.

However, when we compare the performance ofhighly acquisitive high-growth companies to high-growth companies pursuing a mixed strategy, wefind that the acquisitive companies do better.4

Although their average announcement effect forpublic transactions remains slightly negative, it issubstantially less negative than that of the mixed-strategy companies: 1.72 percent versus 2.46 per-

cent, a statistically significant difference. This find-ing suggests that at the time of announcement,investors distinguish between deals conducted byexperienced acquirers and those done by less expe-rienced acquirers. And as recent research describedin the insert suggests, a negative announcementeffect does not necessarily mean that a deal will failto create value over the long term.

Our research also revealed some interesting pat-terns in the way these companies pursued theiracquisitive growth strategies. Exhibit 4 on page 12charts the relationship between CFROI (measuredon the y-axis) and growth in the asset base (meas-ured by change in gross investment, on the x-axis)for the 56 highly acquisitive high-growth companiesin our sample that produced above-average TSRduring the ten years of our study. As the left-hand

10 BCG REPORT

E X H I B I T 3

COMPARATIVE DIVIDEND YIELD AND LEVERAGE, 19932002Highly Acquisitive Growth Companies Pay Lower Dividends and Carry Higher Debt

SOURCES: Compustat; Datastream; BCG analysis.

1Leverage equals total debt divided by total assets.

2Includes only those companies with available data for the full 19932002 period.

Average dividend yield(%)

0

1

2

0

5

10

15

20

25

30

35

40

45Medianleverage1

(%)

Othercompanies

n = 631

Highly acquisitive high-growth companies

n = 74

0.4

1.8

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Highly acquisitive high-growth companies (n = 54)2

Other companies (n = 421)2

4. We have excluded the high-growth organic segment from this analysisbecause it involved very few acquisitions.

graph shows, 26 of these companies started thedecade with CFROI below the cost of capital.Instead of trying to grow out of their problems, theyspent the early years of the decade improvingCFROI, only turning to growth once returns hadreached or exceeded the cost of capital. On aver-

age, these companies grew by 300 percent over theten-year period of our study, and their mediancumulative TSR was 15 percent greater than themarket average. The right-hand graph shows thatthe 30 companies that began the decade withCFROI above the cost of capital generated share-


Our research design differs markedly from that ofmost previous academic and consulting studies ofmerger performance. Many of those studies focus onthe average performance of a sample of individualdeals. Moreover, they measure this performance bylooking at each individual acquisitions announce-ment effectthe short-term change (relative to themarket index) in the acquiring companys share priceonce the deal is made public. Some studies trackperformance for a longer period of timetwo, three,or five years.

This typical research design has some important lim-itations. Because such studies focus on individualtransactions, they do not distinguish among acquir-ers in terms of their strategy or acquisition history.Whats more, this approach allows a few spectacu-larly bad (or spectacularly good) deals to distortoverall performance.

For example, one recent study found that from 1998to 2001, a mere 2.1 percent of U.S. acquisitionsgenerated losses of $397 billion, while the remain-der, the vast majority, generated gains of $157 bil-lion.1 In other words, a relatively small number ofunsuccessful megamergers were responsible for theapparently poor showing of M&A during the recentU.S. merger wave.

H O W O U R S T U D Y I S D I F F E R E N T

Another problem with the conventional approach toassessing merger performance is the assumptionthat the announcement effect is a strong predictor ofeventual long-term results. Recent studies suggestthat this may be far less the case than researchershave thought. For example, a 2003 BCG study foundthat a specific category of mergersthose that takeplace during periods of below-average economicgrowthtend to create value over the long term,regardless of the initial announcement effect.2 Arecent academic study provides additional evidencethat announcement effects do not necessarily predictmid- to long-term performance.3 Another recent aca-demic study argues that as much as 50 percent ofthe price movement in an acquirer s stock at thetime of announcement has nothing to do with themarket perception of the deal but rather reflectsextremely short-term technical effects because ofmerger-arbitrage short selling.4

Our study avoids the pitfalls of typical M&A studies.Instead of focusing on the short-term performance ofindividual deals, we examined the long-termten-yearperformance of individual companies, catego-rized by their degree of acquisition activity. Our goalwas to determine whether the stock market rewardsacquisition-driven growth strategies. We believeours is the first study to take this approach.

1. See Sara B. Moeller, Frederik P. Schlingemann, and Ren M. Stulz, Wealth Destruction on a Massive Scale? A Study of Acquiring-Firm Returns in theRecent Merger Wave, The Charles A. Dice Center for Research in Financial Economics, Ohio State University, Dice Center Working Paper no. 2003-28,August 2003, http://ssrn.com/abstract=476421.

2. See Winning Through Mergers in Lean Times: The Hidden Power of Mergers and Acquisitions in Periods of Below-Average Economic Growth, BCG report, July2003.

3. See Christa Bouwman, Kathleen Fuller, and Amrita Nain, The Performance of Stock-Price Driven Acquisitions, Working Paper, University ofMichigan Business School, May 2003, http://ssrn.com/abstract=404760; and Christa H.S. Bouwman, Kathleen Fuller, and Amrita S. Nain, Stock MarketValuation and Mergers, MIT Sloan Management Review 45, no. 1 (Fall 2003), pp. 911.

4. See Mark Mitchell, Todd Pulvino, and Erik Stafford, Price Pressure Around Mergers, Journal of Finance 59, no. 1 (February 2004), pp. 316 4 .

12 BCG REPORT

E X H I B I T 5

PROFITABILITY AND ASSET GROWTH OF HIGHLY ACQUISITIVE HIGH-GROWTH COMPANIES ( I I )Those That Generate Below-Average TSR Erode CFROI and Shrink Their Asset Base


1Graphs begin in 1992 to capture change in gross investment for 1993 and end in 2001 because of unavailability of 2002 gross-investment data for many companies.

0

2

4

6

8

10

12

5 10 15 20 25

2001

2000

19991998

19971996

1995

1994

1993

1992

0

2

4

6

8

10

12

2001

19992000

1998

1997

1996

19951994

19931992

2 4 6 8 10 12 14

Median CFROI(%)

Weighted average costof capital, 1992 (estimated)

Median gross investmentindex (1992 = 1)1

Companies with 1992 CFROI below the cost of capital


Companies with 1992 CFROI above the cost of capital


n = 2 n = 11

Median CFROI(%)

E X H I B I T 4

PROFITABILITY AND ASSET GROWTH OF HIGHLY ACQUISITIVE HIGH-GROWTH COMPANIES ( I )Those That Generate Above-Average TSR Grow Only When Their CFROI Is Above the Cost of Capital


1Graphs begin in 1992 to capture change in gross investment for 1993 and end in 2001 because of unavailability of 2002 gross-investment data for many companies.

Median CFROI(%)

Median CFROI(%)

0

2

4

6

8

10

12

1 2 3 4 5


2001

20001999

1998

1997

1996

19951994

1993

1992


Companies with 1992 CFROI below the cost of capital

0

2

4

6

8

10

12

14

16

2 4 6 8 10

2001

2000

1999

199819971996

19951994

1993

1992


Companies with 1992 CFROI above the cost of capital


n = 26 n = 30

holder returns almost entirely through growth.During the period of our study, they grew by 800percent, on average, and their cumulative TSR wasa full 58 percent greater than the market average.

Thirteen companies in the highly acquisitive high-growth segment did not generate above-averageTSR. Why not? As the left-hand graph in Exhibit 5shows, two of these companies tried to grow despitea starting profitability below the cost of capital. Al-though at first they seemed to be growing them-selves out of their problems, this growth provedunsustainable. Not only did their profitabilitydecline over the full period of the study, but theyalso hit a wall in the later years and actually had toshrink their asset base. As a result, their cumulativeTSR was a full 65 percent below the market average.

Eleven other companies (shown in the right-handgraph of Exhibit 5) were reasonably profitable atthe beginning of the period, but their profitabilityalso declined over time. Their growth, too, wasunsustainable, since it came at the expense of de-clining returns. By the end of the period, they hadto divest large parts of their portfolio. Its likely thatthey overpaid for the companies they bought or,more likely, that they were unable to realize the syn-ergies necessary to justify the acquisitions. Theirmedian cumulative TSR was 31 percent below themarket average.

The performance of the highly acquisitive high-growth companies in our sample is fully in keepingwith the principles of value management. In fact,the best performers in our entire sample combinedhigh growth with high levels of CFROI, no matterwhat growth strategy they pursued. Exhibit 6 seg-ments our full sample according to each companyslevel of revenue growth and CFROI: low, medium,and high.5 It dramatically illustrates that as CFROIincreases, so does TSR. And companies that com-bine high CFROI with high growth generate thehighest returns of all.

The main implication of this analysis is simplystated: the key to above-average stock-market per-formance is to focus on growth opportunities thatyield the highest returns on capital, no matter howthat growth is achieved. To be sure, simply bulkingup on acquisitions does shareholders no goodunless the acquisitions are based on a sound acquis-itive strategy and effective M&A capabilities. Butthe equivalent is true for companies pursuing agrowth strategy driven by organic investments ofcapital.6 Although faster growers on average out-perform slower growers, independent of the kindof growth, return on investment is the ultimate dif-ferentiator between above-average and below-aver-age growth strategies.


5. Because of limitations in the data, we could estimate average CFROI (net of cost of capital) for only 592 of the 705 companies in our sample.

6. Although much research has been devoted to understanding why acquisitions fail, it is also important to appreciate the relative difficulty of organicgrowth. For example, a BCG study of nearly 600 food launches between 1997 and 2001 found that only 9 percent achieved first-year retail sales in excessof $50 million. See Charting Your Course, BCG Opportunities for Action, November 2003.

E X H I B I T 6

THE IMPACT OF CFROI AND GROWTH ON STOCK MARKET PERFORMANCE, 19932002The Most Successful Companies Combine Above-Average Growth with High CFROI



Average netCFROI:Average annualgrowth rate:

0.4%

5.3%

3.4%

5.3%

13.7%

4.6%

1.2%

22.1%

3.7%

22.8%

16.6%

23.1%

2nd quintile 3rd quintile 4th quintile Median

Low CFROI

Medium CFROI

High CFROI

Low CFROI

Medium CFROI

HighCFROI

0

5

10

15

20

25

30

13.3

10.09.5

7.16.6

19.7

AverageannualTSR(%)

n = 146 n = 122 n = 101 n = 51 n = 75 n = 97

Low Growth High Growth

Our research shows clearly that there is no inherentdisadvantage to growth by acquisition. But thatdoesnt necessarily mean that companies shouldpursue it under any and all circumstances.Acquisitive growth makes sense only when execu-tives can use acquisitions to create sustainable com-petitive advantage. One requirement is world-classM&A implementation skills. But success is first andforemost a question of strategy. Consider threecommon strategies in which acquisitions can makea decisive contribution to competitive advantage.7

Reducing Costs Relative to Competitors

An acquisitions-based growth strategy can be espe-cially effective in fragmented industries, where com-panies can use M&A to consolidate the industry andachieve scale and cost advantage. The pharmaceuti-cal industry is a classic example. Until the early1990s, the industry remained relatively fragmented,with no company responsible for more than 5 per-cent of sales. But the last decade has seen a wave ofacquisitions. Aggressive acquirers have been able tocut their combined cost base in administration, sales,and R&D by 8 percent on average and by as much as18 percent in individual cases. These cost reductionshave led to improvements in earnings performanceranging from 20 percent to 35 percent and havegiven highly acquisitive pharmaceutical companiessignificant advantages over their rivals.

Pfizer is perhaps the most dramatic example in thepharmaceutical industry of a company that hasbuilt a strong competitive position and substantialshareholder value, at least in part by means ofaggressive acquisition. During the period of ourstudy, the company combined above-averagegrowth and profitability to generate an averageannual TSR of 19.4 percent, outperforming theS&P 500 by more than 9 percentage points.Through two recent major acquisitionsWarner-

Lambert in 2000 and Pharmacia in 2003Pfizerhas transformed itself into a nearly $40 billioncompany, the largest in the industry, with a marketcap that makes it one of the most valuable compa-nies in the world. This scale has allowed Pfizer toleverage its excellent sales and marketing capa-bilities across a broad product base, invest in new growth platforms, and position itself to managerisk more effectively in an inherently uncertainindustry.

Acquiring Necessary Capabilities

Other companies use acquisitions to fill in gaps incapability rather than wait to develop those capabil-ities internally. Since the mid-1980s, for example,Cisco Systems has acquired some 82 companies toestablish its dominant position in the data-network-ing industry. Even with the massive declines in mar-ket value incurred by Cisco in the aftermath of thelate-1990s boom, Cisco had an average annual TSRof 28.2 percent during the ten years of our studyand outperformed the S&P 500 by nearly 18 per-centage points.

In the fast-moving data-networking business, intelli-gent acquisition is the most effective way to keeppace with technological innovation. In effect, acqui-sition has become an integral part of Ciscos R&Dstrategy. More than half of Ciscos acquisitions weremade either to expand its offerings or to enhancethe functionality of its current offerings.

Cisco has developed extremely effective capabilitiesin target search and selection, negotiation, andrapid integration. The company is extremely thor-ough in its search process. On average, it considersthree potential markets for every one it actuallyenters and assesses five to ten candidates for everydeal it consummates. Ciscos experienced M&Ateam works well under highly stressful conditions

Strategies for Acquisitive Growth

14 BCG REPORT

7. This section is based in part on material from Hardball: Are You Playing to Play or Playing to Win? by George Stalk Jr. and Rob Lachenauer (HarvardBusiness School Press, forthcoming in fall 2004).

and keeps the company one step ahead of invest-ment bankers in spotting opportunities and gettingdeals done. Cisco also emphasizes the speed andintensity of its integration efforts. The typical dealtakes only three months to execute. A dedicated inte-gration staff at headquarters integrates IT systems,sorts out the roles of new employees, creates com-pensation plans to retain key employees, and meetswith all major customers in the first three monthsafter the consummation of an acquisition. Finally,like a good venture capitalist, Cisco actively managesits portfolio of acquisitions. It is not afraid to divestan acquisition that isnt working out.

Building a New Business Model

Another effective strategy is to use acquisition as away to rapidly scale up a new business model. Thiswas the approach taken by the Newell Corporation(now Newell Rubbermaid). The evolution of Newellis a dramatic example both of the success a com-pany can achieve by using acquisitive growth toestablish a new way of doing businessand of whatcan go wrong when a company strays from itsproven strategy for acquisitive growth.

Newell began its existence in 1902 as a curtain rodmanufacturer. By the early 1970s, it was still a rela-tively small company with less than $100 million inrevenues. But company executives had been observ-ing the growing dominance of large, concentratedretailers such as Kmart and Wal-Mart. The giantretailers were selling billions of dollars worth ofmerchandise supplied by myriad small manufactur-ers with only a few million dollars in revenue. But theproliferation of small suppliers posed logisticsheadaches and quality problems for the retailers.And the small companies often lacked the resourcesto improve their offerings or fill gaps in their prod-uct lines. Newell executives reasoned that big-boxretailers would welcome a low-cost supplier largeenough to meet them on their own termsa com-pany that could simplify purchasing and logistics,provide consistently high-quality products, and offerlower prices. So Newell set out to become a one-stopshop for megaretailers.

Over the next 25 years, Newell made some 100 acqui-sitions. At first, the acquisitions were quite small: sup-pliers of hardware and household products such asdoor handles, paint rollers and brushes, and metalcookware, all with revenues between $5 million and$15 million. But as the company grew, Newell was in a position to pull off progressively larger dealsmost dramatically, its $340 million acquisition in1987 of Anchor Hocking, a company whose sales of $760 million were nearly twice those of Newell atthe time.

The company dramatically improved the operations ofits acquisitions, exploiting economies of scale in logis-tics and the sales force, increasing product develop-ment, and introducing common systems and infra-structure. The result was an integrated low-cost vendorthat grew to more than $2 billion in revenues by themid-1990s and generated shareholder returns amongthe highest on the New York Stock Exchange.

In the late 1990s, however, Newell stumbled. Thesuccess of its business model depended on acquiringa particular type of company: reasonably well man-aged, in good standing with the big discount retail-ers, and not so large that Newell couldnt easily inter-vene to obtain the desired performance. But in 1999,Newell purchased Rubbermaid, a company that metnone of these criteria. Rubbermaid had been slow torecognize the power shift toward the large discountretailers and had alienated them by not beingresponsive to their needs. Whats more, Rubbermaidwas a $2.5 billion companyand the acquisitionsnearly $6 billion price tag made it Newells largest byfar. Because of Rubbermaids size, Newell had diffi-culty assessing its true condition, and whenRubbermaids troubles proved deeper and moreextensive than Newell had realized, the companydidnt have enough resources to fix them quickly.Newells share price suffered as a result. During theten-year period of our study, the companys TSR per-formance actually lagged the S&P 500 average by 2.9percent, largely owing to the Rubbermaid deal. TheNewell story dramatically illustrates just how impor-tant it is to focus only on the acquisitions that trulyfit a companys business strategy.


Experienced acquirers like Pfizer, Cisco, andNewell have developed world-class M&A capabili-ties. For these companies, M&A expertise hasbecome a competitive advantage in its own right.But what about a company that does not have deepexperience in M&A or is trying to do a kind ofacquisition that it has never done before? How doesa company become a successful acquirer?

Companies that want to pursue acquisitive growthneed to develop three key capabilities. First, theymust embed their M&A strategy in a comprehensivegrowth strategy. Second, they need to develop a farmore rigorous approach to the valuation and pric-ing of potential targets than typically takes place inmost companies today. Third, they must learn howto break the compromise between speed and thor-oughness in postmerger integration. Lets considereach of these challenges in turn.

Linking M&A to Growth Strategy

It is striking how frequently executives take what islargely a reactive approach to M&A. A macroeco-nomic turn, a surprise auction, or an acceleratedconsolidation by competitors or customers catchesmanagement off guard. The board demands action,or a bidding deadline looms. Then, like a clockedchess match, movesand mistakesrapidly unfold.Executives focus on the deal at hand rather than onthe total universe of options. They make decisionswithout fully considering their impact. Often, it isnot until after the deal is done that a strategicrationale is made up to justify the acquisition to thestock market. As a result, opportunities and share-holder value are squandered.

For all these reasons, the first step toward becominga successful acquirer is to define a growth strategyand determine the role of M&A in achieving itinadvance of bidding on any particular deal.8 Itsimportant to dedicate resources and time to fully

understand the options well ahead of the emer-gency board meeting, the offering memorandum,or the lead story in the Financial Times or the WallStreet Journal. To do this, company executives needto ask themselves a number of questions:

What are the prospects for organic growth in ourcore business?

Are there more attractive growth paths than re-investing in the core?

If so, how far afield should we look?

What are the best means of entry?

If the answer is acquisition, how can we make surethat we build value and that we have the necessarycapabilities?

Only when they have detailed answers to such ques-tions will a companys executives know whether anacquisitive growth strategy makes sense for them.Consider the dilemma of one U.S. packaged-foodproducer. The company had a dominant share inthe U.S. market in its legacy product line, but eco-nomic trends in the industry seriously threatenedthe companys long-term competitive advantage.For one thing, the continuing globalization of thecompanys big-retailer customers was transformingits category into a global business. Dominance in asingle market was simply no longer good enough.In addition, there were significant scale-based costadvantages in manufacturing and distribution thatfavored larger players. Most important, only a fullassortment of products in its category would enablethe company to gain and maintain a position ascategory captain with the retailersa status thatwould pay handsome dividends in the form of pref-erential positioning of the companys products in stores.

All these trends were driving a rapid concentrationin the industry, as it shifted from relatively small,

Becoming a Successful Acquirer

16 BCG REPORT

8. For a more detailed treatment of this subject, see Charting Your Course, BCG Opportunities for Action, November 2003.

local, focused players to large, multiproduct, globalgiants. (See Exhibit 7.) Unless the company rapidlyfollowed suit, it would be unable to compete. Thisput acquisition squarely on the companys strategicagenda.

Getting a companys growth strategy right can alsoshed light on precisely what kind of acquisitionsmake the most sense. The factors a company needsto look at include the basis for competition in itsindustry, its own organizational competencies, andthe availability of attractive merger candidates.

For example, one durable-goods manufacturer,observing a mix of broadly diversified and narrowlyfocused players in its category, wanted to know if itneeded to diversify in order to survive. A detailedanalysis revealed that the shareholder return ofdiversified players in the industry was no better

than that of focused ones. (See Exhibit 8, page 18.)Furthermore, the manufacturer could realize fewsynergies across broad categories along the valuechain because the categories had dissimilar gainsfrom scale. Distribution advantages also differeddepending on the point of fabrication, and majorcustomers did not place great value on workingwith a more diversified supplier. But althoughbroad-based diversification did not make competi-tive sense for the company, expansion into a nar-rower set of related categories where the manufac-turer had brand relevance and an advantage inmaterials science did. The company is now prof-itably following that strategy and using it to createvalue for its shareholders.

Only when a company has a clear sense of its strat-egy and the proper role of M&A can it narrow thefield of available properties. By quickly eliminating


E X H I B I T 7

COMPETITIVE TRENDS IN THE GLOBAL PACKAGED-FOOD INDUSTRYFor One U.S. Company, Industry Trends Made Acquisition a Strategic Imperative

SOURCE: BCG analysis.

NOTE: This exhibit is for illustrative purposes only. Data have been disguised for reasons of confidentiality.

Number of top-ten geographic markets with significant company sales

0

2

4

6

8

10

20 40 60 80 100

Participation across category segments (%)

Company Competitors

Low costs Global reach Category captaincy

all the possible deals that dont make strategicsense, executives can devote their time to preparingdetailed dossiers on the most likely candidates anddeveloping a source book and game plan for activeor reactive M&A moves downstream.

Implementing High-Definition Valuation

One of the chief reasons that so many acquisitionsdestroy value is the willingness of senior executivesto overpay for seemingly attractive targets in thepursuit of synergies that either dont exist or can-not be achieved.9 Deal fever can infect even themost experienced of senior executives, causingthem to talk themselves into overly optimistic esti-mates of synergies and the potential upside in anattempt to justify the price they think they have topay to win the bidding. Whats more, they often

underestimate the likely disruption to their corebusiness from the cost and effort of doing the dealand carrying out the PMI.

Deciding on a reasonable price for the acquisi-tionand avoiding overpaymentrequires carefulvaluation of the combined entitys potential upside.We advocate a far more rigorous approach to valua-tion than most companies take. The typical ap-proach goes something like this: the would-beacquirer analyzes comparable transactions andindustry multiples, builds a discounted-cash-flowmodel based on the stand-alone value and likelyearnings trajectory of the target, then adds overlaysfor projected cost and revenue synergies. To

18 BCG REPORT

E X H I B I T 8

THE DISTRIBUTION OF PROFITABILITY AND SHAREHOLDER RETURNS IN A DURABLE-GOODS INDUSTRYFor This Company, Acquisition to Achieve Diversification Did Not Make Economic Sense

SOURCE: BCG analysis.

NOTE: This exhibit is for illustrative purposes only. Data have been disguised for reasons of confidentiality.

Five-year CFROI(%)

1

3

5

7

9

11

13

15

30 20 10 0 10 20 30 40 50

S&P 400

Weighted averagecost of capital

Five-year averageannual TSR (%)

Competitors (showing sales within industry category) Company

9. See Mark Sirower, The Synergy Trap: How Companies Lose theAcquisitions Game (Free Press, 1997).

estimate cost synergies, executives typically usescale-economy rules of thumb. Revenue synergiesemerge through consensus. Finally, the acquirermines the sellers data room, conducts site visits, and revises the valuation based on what it finds.

Such an approach falls short because a lot of infor-mation that materially impacts value lies outside itsscope. The greatest information shortfall comeswhen new management teams tackle their firstacquisition or when experienced acquirers weigh amassive or game-changing transaction. In suchinstances, we recommend an approach that we callhigh-definition valuation.

An acquirer needs to take an all-encompassing viewof the value that might be created or lost in aprospective transactionincluding all the externalaspects of a transaction and its indirect conse-quences. Take the example of resource diversion.In theory, any project with a positive net presentvalue justifies incremental investment. In practice,however, time and resources are constrained, andacquisitions rob other initiatives. For this reason,its important to review the impact of a potentialacquisition on internal projects. For a given esti-mate of required acquisition and integrationresources, what internal projects will be eliminated,discounted, or delayed? How much should thetransaction upside be discounted as a result?Answering such questions helps ensure that thecompany pays only for unique, incremental transac-tion value and that it doesnt credit the deal withfalse synergy.

Its also important to quantify the costs of inaction.Forfeiting a property to a competing bidder notonly closes off the potential upside but also exposesthe companys existing plans to a strengthenedcompetitor. Where and how is a competing bidderlikely to attack if it acquires the target company?What markets would the combined footprint of the two companies put at risk? What productlaunches might this new competitor preempt withstrengthened R&D? How would its new cost posi-tion pressure prices? Answering such questions canhelp a company anticipate and minimize future

damage. It also reveals the true value of acquiringthe target.

When it comes to estimating the stand-alone valueof a target, it often pays to do original customerresearch rather than base projections on historicalor average performance. For example, an acquirercan research the targets most recent product per-formance, interview subjects with knowledge of thetargets business (including blind interviews ofimportant suppliers and customers), and conductan in-depth study of heavy-user segments and theirconsumption trends.

There are also a number of things a company cando to test an acquisitions upside. An acquirer caninterview potential customers on the benefits of themerger in order to substantiate the estimated rev-enue; identify opportunities for rationalization byassessing plants and facilities; and map the overlapof acquirer and target patents, as well as tear downrecent product launches, to estimate combinedinnovation potential.

Finally, acquirers shouldnt wait to think about post-merger integration until after the deal closes. Pre-merger integration exercises can simulate the inte-gration process well before a deal is imminent.Because its impossible to fully understand a dealssynergy potential without evaluating the integrationrisks, companies should develop a set of cost andrevenue upsides with quantified probability by func-tion, along with an implementation plan for theresource commitments required to achieve thosebenefits. If managers are made accountable fortheir analyses, this exercise builds realism into thevaluation. It also provides a detailed road map forthe eventual postmerger integration.

Of course, even the most painstaking evaluation ismeaningless if the upside is squandered in the bid-ding. A structured approach to setting openingand walk-away price points can ensure that identi-fied value is brought back to shareholders. And itcan inoculate management against deal fever. It isimportant to establish opening bids on the basis ofprecedent transactions, a conservative estimate ofvalue creation, and an understanding of the trans-


action upside and the funding constraints ofcompeting bidders. It is no less vital to set andstick to walk-away price points based on an aggres-sive but achievable estimate of the upside and ofcritical thresholds for funding, dilution, and earn-ings-per-share accretion. Finally, its essential todevelop a clear-eyed view of possible competingbidders and their bidding potential. When anacquirers estimated upside is based on a uniqueadvantage, competitors should be unable to matchits bid.

The real power of high-definition valuation is in thetiming. Every aspect of the analysis can be accom-plished well ahead of the bidding, across a numberof worthy properties, without an offering memo-randum, and without a data room. This type of earlyvaluation provides a commanding view of optionsfor expansive growth. It enables a potentialacquirer to move swiftly, value accurately, and bidintelligently when the time is right.

Realizing Value Through Effective PostmergerIntegration

In the end, its not the acquisition itself that createsvalue but rather the postmerger integration. This iswhere the synergies that will pay for the acquisitionare actually realized. The integration process canmake or break a merger and often differentiatesexperienced, successful acquirers from the less suc-cessful ones.

Effective postmerger integration is a complicatedbalancing act. On the one hand, speed is of theessence. Potential synergies must be realizedquicklyin the first 12 to 18 months after thedealin order to communicate to the market thatthe merger is on track. Whats more, the longer sen-ior executives are preoccupied with the internaldetails of the integration, the more likely they areto lose focus.

On the other hand, an integration has to be thor-ough. In far too many cases, speed comes at theexpense of comprehensiveness. Because executinga postmerger integration is such a high-pressureactivity, there is a great temptation to declare vic-

tory too early. Executives often settle for subopti-mal decisions. Interim organizations that are morethe product of organizational politics than businesslogic have a way of becoming permanent. Potentialsynergies are identified but never completely cap-tured because the organization loses its concentra-tion. Good ideas are never thoroughly pursued. Inmany cases, substantial money is left on the table asa result.

It takes courage and persistence to challenge suchcompromises and see things through to the end.Its critical, of course, to have a structured PMIprocess with clear objectives and accountabilities,well-defined phases and timetables, and ambitioustargets with strong incentives to achieve them. Butprocess alone is not enough. It is even more impor-tant to have the right mindsetan animating visionthat makes the process robust and results orientedas opposed to simply mechanistic. Senior executivescan achieve these goals by focusing on three spe-cific objectives.

The first is to minimize the PMIs disruptive effecton the core business. Pulling off a successful PMI istoo important to do in magic time or assign to exec-utives who already have important line responsibili-ties. Tasks need to be segregated from the core busi-ness, and the PMI needs its own organization,responsible executives, and faster-than-normal gov-ernance and decision-making processes. Thats whyexperienced acquirers such as Pfizer, Cisco, andNewell appoint dedicated executives and explicitlycarve out management-team time to lead their PMI efforts.

Second, any serious PMI process needs to have aplan in place to ensure the smooth functioning of the core business. Companies need to beextremely vigilant about any falloff in revenue andready for rapid intervention should it occur. Typicalmechanisms for doing so include early-warningtracking systems to monitor emerging revenuetrends, special temporary incentives to ensure con-tinuity of performance on the part of salespeopleand other key staff, and strategies to make sure that soon-to-expire contracts arent poached bycompetitors.

20 BCG REPORT

Once a company has detailed plans in place forrunning both the PMI and the ongoing business, itwill find that there are many opportunities forcross-fertilization between the two. Take the exam-ple of a global industrial-goods conglomerate thathad recently purchased a smaller rival. As might beexpected in this highly capital-intensive business,the initial focus of the PMI was mainly on takingcost out of the combined manufacturing operationof the two companies. But the global PMI effortuncovered an unanticipated opportunity on therevenue side in marketing and pricing.

One of the PMI teams, based in Asia, discoveredthat there were no explicit rules for pricing to cus-tomers in the same segment that bought the sameor similar products. When the team plotted its find-ings, the result was a cloud of dots showing no dis-cernible rhyme or reason to the prices charged tosimilar customers.

When the companys executives learned of theAsian teams discovery, they made it the focus of amajor effort: the development of a framework forsegmenting customers and setting prices that couldbe applied across all the 46 countries where thecompany operated. The work identified opportuni-ties for improving the companys net margin by 1 to2 percentage points, an enormous increase in abusiness where a half-point reduction in cost is sig-nificant. In effect, postmerger integration becamethe catalyst for a major shift in the companys pric-ing strategy.

A third way to break the compromise betweenspeed and thoroughness is to routinely revisit syn-ergy targets and results in the years after the formalintegration is completed. Often during a PMI, acompany has to make decisions for pragmatic orpolitical, as opposed to purely business, reasons.They may make sense at the time, but unless theyare revisited later, they can build uncompetitivecosts into the business.

Executives at one newly merged global foodcompany, for example, knew that their companysinternational business was subscale. The logicalmove would have been to create a global unit com-

bining the new companys two chief segments. Butthis new organizational design faced a major obsta-cle: the opposition of the two powerful seniorexecutives who headed the separate units andbelieved that integrating them involved too muchbusiness risk. The senior management team agreedto keep the two organizations separate for the timebeing. But they also made an explicit decision torevisit the move in two years. When the time wasright, the company created an integrated globalunit and achieved the cost savings that came withincreased scale.

As important as it is to hit a companys synergytargets, it is also important to remember that PMI is not just a numbers game. It is a complex changeprocess that reknits the human fabric of the organi-zation. Executive careers are on the line. PMI leadershave to identify and retain key talent and persuadethe two organizations that they have a better futuretogether than apart. Whats more, all this must bedone in an environment that will inevitably be col-oredand, to a degree, distortedby uncertaintyand anxiety. In PMI, this soft stuff is often the hard-est to get right.

One company, for example, had an acquisitiondisrupted by the unanticipated loss of some keyindividuals from the target company on the veryfirst day of the PMI. A few years later, when thecompany was in the process of acquiring a secondtarget in what was the largest acquisition in thehistory of its industry, senior executives weredetermined not to make the same mistake again. Ateam in corporate HR developed a sophisticatedtracking tool that captured key information abouttens of thousands of employees at the acquiredcompany.

The system linked every employee to the mostappropriate division or department of the acquir-ing company. It also included the employee evalua-tions conducted as part of the integration process,which identified high-talent personnel. The sys-tem tracked the positions in the new combinedcompany for which each individual had been inter-viewed. It also noted any offers extended to them,whether they had accepted, their willingness to


22 BCG REPORT

relocate, and other pertinent information. As aresult, management had a way of tracking andretaining high-talent employees. Just as important,from the very first day of the PMI, all the employeeshad a clear understanding of where they stood andto whom they reported. (Among other things, theywere already included on the relevant e-mail distri-bution lists.)

Practices like these help to make a companys ap-proach to PMI disciplined, rapid, and thorough.When combined with a well thought-through strat-egy and rigorous valuation and pricing, they allow acompany to capture the full value of a potentialacquisition. Developing such capabilities puts acompany in a strong position to take full advantageof future opportunities for acquisitive growth.

Conclusion


Despite negative studies and headlines, mergersand acquisitions will continue to be an importantcomponent in building successful strategies forgrowth. Whether fueled organically, through acqui-sitions, or by a mixture of both, growth is growth,and any kind of growth has the potential to createshareholder value when it achieves consistent levelsof operating returns above the cost of capital. Thewinners will be companies with a clear strategy forgrowth, an understanding of the conditions inwhich acquisitive or organic growth makes sense, an

ability to anticipate and manage the risks involved,and the capabilities in place to deliver on theirstrategic goals.

The debate should not be about whether an acquis-itive or an organic strategy creates the most value,but when and under what circumstances to growthrough M&A and when to grow organically. Its notabout avoiding or embracing acquisitions butrather about how to build a growth strategy that willcreate a substantial cash return on the investment.

24 BCG REPORT

Thinking Differently About Dividends

BCG Perspectives, April 2003

Managing Through the Lean Years

BCG Perspectives, February 2003

Taking Deflation Seriously

BCG Perspectives, January 2003

New Directions in Value Management

BCG Perspectives, November 2002

Making Sure Independent Doesnt Mean Ignorant

BCG Perspectives, October 2002

Treating Investors Like Customers

BCG Perspectives, June 2002

Back to Fundamentals

The 2003 Value Creators report by The Boston Consulting Group,

December 2003

Winning Through Mergers in Lean Times: The Hidden Power of Mergersand Acquisitions in Periods of Below-Average Economic Growth

A report by The Boston Consulting Group, July 2003

Succeed in Uncertain Times: A Global Study of How Todays TopCorporations Can Generate Value Tomorrow


October 2002

Dealing with Investors Expectations: A Global Study of CompanyValuations and Their Strategic Implications


October 2001

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