Is M&A the Only Way To Top-Line Growth?

Eager for more revenue than organic growth can provide, companies are returning to the merger-and-acquisition market. But they are choosing their targets carefully.

Acquisitions are back. Companies relied on radical cost cutting to restore profitability during the depths of the 2001-2002 downturn, but in 2003 executives realized that higher earnings would have to come from increased revenues, and a new wave of acquisitions began. Today, buyers are paying premium prices for carefully chosen targets, and they have strong expectations for returns. Those expectations, combined with greater shareholder scrutiny and the requirements of the Sarbanes-Oxley Act, are prompting deeper due diligence and tighter risk management.

CFOs and finance departments are more involved than ever before in their organization's merger-and-acquisition (M&A) activities, and they are moving quickly to secure the best targets. Robert K. Shearer, CFO and vice president of finance and global processes with VF Corp., the Greensboro, N.C.-based global apparel giant, completed three acquisitions in 30 days flat this summer, on the heels of a major purchase in August 2003. The company expects these companies to contribute $1 billion in sales to its total revenue of $6 billion for 2004. "Acquisitions are a key component of our growth strategy," says Shearer.

In the first eight months of this year, U.S. corporations announced 6,530 mergers and acquisitions valued at $555.8 billion, up from 5,529 deals worth $278.3 billion for the same period in 2003, according to Mergerstat. In a global survey of more than 100 executives at large companies conducted by Accenture in mid-2004, 70 percent of respondents said that their organization either was already undertaking M&A operations or planned to do so within 12 months. (See Big Players Looking for Targets.)

The fastest growth is in the middle market, among targets valued at less than $500 million. Not since the second quarter of 2001 has this crucial segment of the merger-and-acquisition market been so active. VF operates in this zone, targeting midsize companies with strong growth potential.

Although some multibillion-dollar deals have been announced this year, the megadeal mania of the 1990s shows no signs of reemerging. The Accenture survey found that overall deal size relative to acquirer revenues is shrinking and that executives are skeptical of the value that can be generated though large deals. Only 8 percent of respondents reported that they expect their organization's next M&A transaction to be a merger of equals. Seventy-four percent said they expect it to be an acquisition of a smaller player.

Instead of the huge, headline-grabbing mergers of the pre-recession era, companies are back to the hard work of building growth by buying strategic pieces of the market that infuse the enterprise with new products, customers or distribution systems.