Experience makes the difference between successfully closing M&A deals and either missing opportunities or making poor choices. In BCG’s decades of supporting and studying transactions, we have found that—in the long run—companies that regularly engage in deals create more value and have higher success rates. Overall, they create superior returns, whereas less-experienced companies tend to destroy value. (See Exhibit 1.)
What gives experienced companies their edge? They understand the fundamental importance of strong executive ownership and strategic guidance over M&A priorities. Critically, they also recognize the essential role of a dedicated and capable M&A organization to support their transaction activities. Operating with a clear mandate and a well-structured, end-to-end process, the M&A organization collaborates with business units to identify targets and execute deals while expertly navigating a minefield of risks.
In a large-scale effort, BCG collaborated with global dealmakers to study the common pitfalls and success factors involved in setting up M&A organizations. The study included a survey of senior leaders from various regions, industries, and functions. (See “About the Survey.”)
The study’s findings indicate that making the right choices in several key areas is essential for building effective M&A organizations. Because each organization is unique, companies must tailor their design choices across these topics on the basis of a detailed understanding of the pros and cons. Companies that succeed will create top-notch teams that are prepared to act decisively and effectively throughout the life cycle of each deal.
Understanding the common pain points that M&A professionals face in their daily work is crucial to designing effective organizational structures. Survey respondents highlighted several obstacles that many of them have encountered. (See Exhibit 2.)
The most frequently cited challenge is a lack of promising targets: 47% of respondents mentioned shortcomings in their organization’s target search process. Nearly as many (46%) pointed to unduly prolonged processes during transaction execution. And 43% noted the absence of a clearly defined growth strategy or described their company’s approach as too opportunistic.
The scope of the M&A organization’s perceived responsibilities throughout the deal process is another significant issue. Survey respondents see themselves as having a clear mandate to develop strategic rationales, conduct negotiations, provide financial analyses, perform valuations, and manage processes and programs. (See Exhibit 3.) But relatively few respondents see themselves as internal advisors, integration planners, and communicators. For maximum effectiveness, the deal team should be deeply involved in all of these areas.
Our discussions with successful dealmakers reinforce the importance of ensuring that the M&A organization have a broader set of capabilities. (See “Lessons From Maersk’s M&A-Driven Transformation.”)
Building an effective M&A capability involves tailoring various design options to the company’s specific goals. There are four key areas to consider: governance structure, functional structure and team size, collaboration models, and processes and tools. Companies can consider a set of questions to guide their choices among the available options. (See “Questions to Guide Design Decisions.”)
An M&A organization’s governance structure should align with the company’s strategic objectives and business environment. The top-down governance approach emphasizes a structured and hierarchical decision-making process in which directives flow from senior executives to the operational teams. It is suitable for organizations operating in traditional and less dynamic industries. The primary advantages of this structure are clear guidance and efficiency, leveraging of executive expertise, and structured communication. However, it may also limit flexibility and slow decision making.
Bottom-up governance, in contrast, encourages more ideation and innovation from lower organizational levels. Because this approach facilitates flexibility, innovation, and faster decision making, it is popular in dynamic and innovative industries where agility is crucial. It is also widely employed by large conglomerates that have diverse, unrelated business units. Potential challenges of this governance structure include strategic misalignment among organizational levels and lack of transparency.
In any governance structure, decision-making bodies play important supporting roles. Depending on the region, the board of directors or C-level executives approve and update the investment strategy, allocate capital, and define group policies. These leaders also develop processes and responsibilities related to M&A activities, ensuring strategy implementation across the organization. In an overlapping role, the investment committee prioritizes and recommends investment decisions in line with strategic objectives, challenges deal teams (for example, by verifying assumptions and prioritizing additional analysis), and contributes to M&A strategy execution.
The structure of the M&A function must align with the company's overall strategy, ensure effective integration of acquired entities, and support seamless operations. Several dimensions impact this structure:
Benchmarking and skill identification are essential to ensure that the M&A team has the resources and skills it needs to handle various challenges. For example, benchmarks are available for calculating the average number of FTEs necessary to deliver a specific number of deals per year, or the optimal ratio of executives to junior professionals. A BCG benchmarking survey revealed that the average number of FTEs per M&A team increases steadily as the volume and value of deals rise. (See Exhibit 4.) For teams with the largest deal volume and value, however, the number of FTEs decreases slightly—suggesting that serial dealmakers can leverage superior capabilities to enhance their teams' efficiency.
There are several collaboration models, each with its own distinct levels of interconnectedness and stakeholder involvement:
Establishing clear processes and leveraging appropriate tools are critical to streamlining activities and achieving desired outcomes.
In designing their processes, companies need to adopt a set of principles that will ensure alignment with best practices. Successful acquirers follow well-defined criteria, maintain a predetermined M&A approach, and have a clear view of desirable targets. They also align key responsibilities and available resources on the basis of deal size. Unambiguous decision-making responsibility averts confusion and ensures accountability. To monitor each deal’s progress, leading companies establish stage gates, approval procedures, and tracking mechanisms.
Companies can use several tools to support processes across the full M&A life cycle. Origination tools assist in the initial stages, including target search, scouting, digital deal marketplaces, and target evaluation. Execution tools aid in project management, data handling, and due diligence. Integration tools track synergies, monitor the progress of integration, and support a post-mortem analysis of the deal. Other tools are available to manage the deal pipeline and track deal progress, thereby providing a comprehensive view of M&A activities.
Drawing on lessons from best-in-class dealmakers, we have identified nine imperatives for elevating M&A organizations to top-notch functions:
Managing Director & Senior Partner; Global Leader of Transactions & Integrations
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BCG's annual mergers and acquisitions report covers M&A activity by year, the current state of the market, and perspectives on deal-making trends.
Global M&A activity remains below historical norms, even as activity has rebounded from last year’s trough.
BCG experts in seven regions of the globe describe the state of play in their M&A market and share insights about near-term deal drivers.
A BCG study finds that timelines for deal closure have lengthened, especially for larger transactions.