Your Best M&A Strategy


The recent collapse in stock prices at some high-profile deal makers has led many executives to pull back from acquisitions. But consider the counterpoint offered by Cincinnati uniform-supplier Cintas. Since the 1960s, Cintas has supplemented its organic growth with a steady diet of small acquisitions. In the past five years alone, the company has spent $3 billion on more than 250 deals, which have accounted for 40% of its revenue growth. Cintas has boosted sales by 20% annually since 1986 to reach $2.3 billion in FY 2002, leapfrogging, along the way, to first place in its industry. In the same period, the company’s market cap has grown 23% per year to $8.5 billion. Shareholders have reaped the rewards of Cintas’s methodical acquisitions, receiving an average annual return of almost 21%—five percentage points more than the company’s cost of equity.

The Cintas story isn’t unique. Our research shows that the companies most successful at creating long-term shareholder value tend to be constant acquirers through boom and bust. They treat acquisitions the way cost averagers treat mutual funds: They buy low, they buy high. Above all, they buy systematically—winning either as a rising tide lifts stock prices or, even more so, by picking up assets in recessionary times at fire-sale prices.

Fast and Steady

We studied 724 U.S. companies with revenues of more than $500 million in 2000. First, we examined the 7,475 acquisitions they made between 1986 and 2001. Then we compared the firms’ acquisition behavior with the excess return delivered to shareholders (we defined excess return as the total return to shareholders, including dividends, minus the cost of equity, or the investor’s expected return).

Simply put, we found that the more deals a company made, the more value it delivered to shareholders. The 110 “frequent buyers” in our study—those that had made more than 20 deals in 15 years—outperformed firms that had made one to four deals by a factor of 1.7 and nonbuyers by a factor of almost two, on average.

Naturally, excess return varied a lot, and the outcome of acquisitions was only one factor in the mix. But the performance of the less frequent buyers and the nonbuyers varied more than the performance of the frequent buyers, and the frequent buyers were more likely to achieve returns above their cost of equity.

Frequent buyers are not all alike. To examine them more closely, we split them into four groups: constant buyers, which bought consistently through economic cycles; recession buyers, which increased their buying in recessionary times; growth buyers, which bought principally in growth periods; and doldrums buyers, which tended to buy in stable or slightly uncertain periods between recession and growth. The 19 constant buyers were by far the most successful, outperforming the growth buyers by a factor of 2.3 and the doldrums buyers by a factor of 1.8. The 27 recession buyers came in second, outperforming the growth buyers by a factor of 1.4. (See the exhibit “Buy Low, Buy High.”)


Buy Low, Buy High Companies that make frequent acquisitions perform best when they buy systematically through economic cycles. (In our study, “frequent buyers” were companies that made more than 20 deals between 1986 and 2001.) Those that skew their buying to specific parts of the cycle—recession, growth, and in between (doldrums)—lag behind constant buyers in excess returns.average excess return2.01.00Excess return1 indexed to average1.74constant buyers1.06recession buyers0.75growth buyers0.96doldrums buyers“frequent-buyer” companies grouped by acquisition strategy1. Excess return is total shareholder return minus cost of equity (expected return).ExhibitIndicatorEnd

The most successful of the frequent buyers (the best of the constant and recession buyers) shared a common set of disciplines. They started with small deals, institutionalized their processes, and created feedback systems to make sure that they learned from their mistakes. They continually reviewed targets and kept ready lists of companies they’d buy if the price was right. They built a standing team for deal making that participated in all acquisitions and that allowed the company to strike expertly when the right deal hit the block. They got line management involved early in due diligence, and they devised clear guidelines for integration of acquisitions.

Deal Killers

Most important, these frequent buyers excelled at walking away from risky deals. At Cintas, every deal, no matter how small, gets scrutinized by a dispassionate executive, according to CEO Robert J. Kohlhepp. That’s because interested parties often have powerful incentives to consummate deals, even if an acquisition seems ill-advised. M&A teams, for example, are rewarded for how many deals they make, and operations people want growth so they can increase their responsibilities and boost their potential income.

Counteracting these forces requires high-level oversight—a CEO or other ranking executive who has no qualms about pulling the plug if a deal smells wrong. At Cintas, every deal requires sign-off from one of only three executives, including Kohlhepp, who have remained apart from the day-to-day acquisition process. On large deals, the board must give its blessing, and the board sets a price limit in advance. If negotiations yield a price above that amount, the deal team must walk away.

All of the successful acquirers in our study share Cintas’s comfort with killing deals, and many insist on high-level approvals. Some of the companies also adjust incentives to ward off ill-considered acquisitions. They tie rewards to the long-term success of the acquired business rather than to the completion of the deal. When companies temper discipline with continuous acquisition, the results speak for themselves.

A version of this article appeared in the March 2003 issue of Harvard Business Review.


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