The right organization for mergers and acquisitions

Internal organization that manages a company’s M&A processes has always been a major contributor to the success of its deals. Today, as companies increasingly choose to manage their M&A processes internally, without the support of financial advisers,1it’s all the more important to have the right team in place. This team must not only be skilled at screening acquisition targets, conducting due diligence, and integrating acquired businesses but also have the size, structure, and credibility to influence the rest of the company.

Admittedly, most of the best practices for designing an M&A organization are well known. But, in our experience, many companies fail to put them into practice. M&A teams include members with unnecessary skills as often as they lack members with essential ones. Too little capacity is a common problem, but inflated teams frequently create issues as well. The effect on a company’s ability to capture value from its deals is notable. According to our 2015 survey, high-performing companies2are significantly more likely than low-performing ones to report that they have the necessary skills and capacity to support essential predeal activities. Moreover, nearly two-thirds of underperforming companies lack the capabilities to integrate their acquisitions

Most senior executives understand the importance of strategically shifting resources: according to McKinsey research, 83 percent identify it as the top management lever for spurring growth—more important than operational excellence or M&A. Yet a third of companies surveyed reallocate a measly 1 percent of their capital from year to year; the average is 8 percent.

This is a huge missed opportunity because the value-creation gap between dynamic and drowsy reallocators is staggering (exhibit). A company that actively reallocates delivers, on average, a 10 percent return to shareholders, versus 6 percent for a sluggish reallocator. Within 20 years, the dynamic reallocator will be worth twice as much as its less agile counterpart—a divide likely to increase as accelerating digital disruptions and growing geopolitical uncertainty boost the importance of nimble reallocation.