This Decade-Old Wisdom Is Wrong

Editor's note: Mergers and acquisitions (M&A) have gotten a bad rap in recent years. But according to Joel Litman – founder of our corporate affiliate Altimetry – not all of these deals are bad news. In this piece, adapted from an October issue of the free Altimetry Daily Authority e-letter, Joel explains why it's crucial to have a game plan in this arena... and shares how one company illustrates the secret to success in M&A.

In 2011, a Harvard Business Review article caused panic on Wall Street...

It claimed that between 70% and 90% of mergers and acquisitions (M&A) fail to generate any value – and worse, that they actually destroy the value of the acquiring company.

That's the last thing investment banks want to hear... since they make a huge chunk of money advising M&A deals.

Thankfully, the article didn't seem to stop companies from trying to be part of the minority that did succeed.

However, it created a bit of a stigma around M&A for investors. While the stocks of acquired companies tended to do well after a deal was announced, the stocks of the acquirers typically struggled.

New research is now telling us a different, more promising story for the acquisition landscape...

As I'll discuss today, companies with a game plan can be successful in M&A. I'll cover two companies that have a good track record when it comes to acquisitions... and I'll share some best practices for the types of M&A that are likely to do well.

Successful M&A takes a sound strategy. And the secret is to start small...

According to a September Wall Street Journal article, companies that do frequent smaller deals tend to outperform. This allows them to better identify targets, integrate businesses, and reap the financial rewards.

By contrast, companies that set their sights on nothing but big acquisitions, without a sound playbook for success, are likely to struggle.

Now, that's not to say that all large acquisitions will fail... It's just that companies that start with several smaller acquisitions tend to be better acquirers.

For instance, medical-equipment maker Thermo Fisher Scientific (TMO) has acquired about 40 companies in the past decade.

Some were tiny. It bought molecular-diagnostics company Premaitha Health for just $4.2 million back in 2015. And in 2018, it acquired rapid-DNA-technology company IntegenX for $66 million.

Those helped it succeed with its $21 billion blockbuster acquisition of clinical-research leader PPD in 2021. After that deal closed, Thermo Fisher's stock actually outperformed the stock market.

Or take life-sciences conglomerate Danaher (DHR), for example. It's another master acquirer...

The $160 billion company designs, manufactures, and markets professional, medical, industrial, and commercial products. Its devices are used in everything from genetic testing to clean-water analysis.

Overall, Danaher is a great example of a company that uses M&A to create value...

It has made more than 50 acquisitions since 2013. Most of them have been small... like its acquisition of Pall-Austar for $35 million and Sutron for $44 million.

That strategy has paid off handsomely. Danaher's share price has surged more than 1,000% since 2009. Take a look...

In short, Danaher does M&A the right way. In fact, it follows a specific playbook when it comes to acquiring new businesses... which it calls the Danaher Business System ("DBS").

The DBS ensures that Danaher only acquires companies that make its business more profitable. Before it buys companies, it makes sure it can either cut costs by using its larger distribution network or increase sales while keeping costs roughly flat.

Take a look at Danaher's Uniform return on assets ("ROA") over the past decade-plus. At Altimetry, we use Uniform Accounting to avoid the distortions in traditional accounting methods. And as you can see, the company has managed to maintain impressively high profitability while making acquisitions...

Danaher's Uniform ROA has stayed above 15% since 2007... And it has more than doubled since 2019. That's rare for a company with so many acquisitions.

Many acquirers don't have a good playbook for integrating new companies into their business. It can take months, sometimes years. And what's worse, the process ends up being more costly than expected.

Danaher, on the other hand, has found a way to avoid these problems with the DBS.

And it's still making strategic acquisitions today...

Last week, Danaher completed its $5.7 billion acquisition of life-sciences company Abcam (ABCM).

In this case, Danaher should be able to run Abcam's protein consumables through its existing distribution network... which should help the company grow its sales while keeping costs low.

If history is any indication, this should only help Danaher get larger and more profitable. And yet, due to the stigma around M&As, its stock stumbled after the acquisition was announced. And it still hasn't completely recovered.

This is one more successful acquisition Danaher can add to its books.

And to us, the recent pessimism looks more like a buying opportunity than a reason to stay away.


Joel Litman

Editor's note: Now more than ever, companies need a game plan to survive and grow. That's why Joel and Chaikin Analytics founder Marc Chaikin recently came forward to tell you exactly what to do with your money in the months ahead...

In short, Joel warned that a new financial crisis has been developing quietly in many stocks. But this destabilizing event will lead to both losers and winners... because one rare investment can soar up to 5x in times like these. Don't get left behind as this shift takes place... Watch a replay of the presentation here.

Further Reading

To understand a business, it's helpful to consider several metrics. But you might not find all of them in a typical annual report. One public source of information can tell you a lot about a company's true value – yet most folks have never heard of it... Read more here.

"Beware the private-equity firm that tries to get rid of its companies," Joel writes. These firms are failing their game plan today. They're struggling to offload their funds' investments. And that's a problem for private and public investors alike... Learn more here.