M&A is kinda sexy. It can be exciting, challenging, rewarding, and risky. All the elements of a dramatic movie. You have heroes, villains, a climax, and a conclusion. Naturally, if you work in business, you want to be part of the deal in some way. Big deals make headlines, and the news travels through the city or market that Company X bought Company Y.
I often tell people that if you have an up-and-coming person in your organization and you're working an M&A deal, put them on it as a special project. The lifecycle of a deal is almost like an MBA condensed into a year or less. And an organization that "learns" how to do M&A gains a powerful tool that pays off in a lot of ways.
Good deals are transformative. Years ago, I was afforded the opportunity to run a deal that totally reshaped the enterprise and created value that goes well beyond the financial statements. When a deal works, it can change the trajectory of a company for years.
Recently, I started exploring a broader question. If a company had the same amount of capital to deploy over ten years, would it generate more shareholder value by making one, maybe two, large acquisitions, or by making a series of smaller ones? Before I get into the research, here's my OG thought: a series of smaller ones, over the test of time, would drive a higher long-term return to shareholders.
Spoiler alert. I was right. Kinda. I guess that means I was wrong too. Kinda.
What does AI think? Well, it thinks I'm right. But not for the reason I thought I was right. Is it arrogant to disagree with AI, knowing it's basically a blend of experts and a higher level of thinking than I'm capable of? To be honest, I think it's right, but not totally.
But before I get to where AI and I diverge, let's look at the data.
The Research
McKinsey studied acquisition strategies across thousands of large companies for more than two decades. They split companies into four groups: predominantly organic growers, selective acquirers, companies that rely on large transactions, and what they call "programmatic acquirers." That last group is the frequency group, the one I believed would win in the long run. They consistently make multiple small and midsize acquisitions as part of their overall strategy.
The programmatic acquirers outperformed their industry peers by about 2.3% a year. The infrequent big swingers generated no excess value over their industry. Selective acquirers trailed, and interestingly, the companies that did no acquisitions at all performed the worst. Take note, CFOs…the aggressive gunslinger who drives you nuts might be onto something.
Keep in mind that 2.3% is annual. Compound it over a decade and the gap is roughly 25%. That's significant.
A Bain study backed up the McKinsey data. Covering more than 18,000 acquisitions, they found frequent acquirers produced materially higher excess returns than infrequent acquirers, and more than twice the returns of companies that largely stayed out of M&A.
That doesn't mean big deals are bad deals. But the risk/reward deserves a hard look.
Boston Consulting Group (BCG) looked at nearly 1,300 major public-company acquisitions over 25 years and found the median deal was roughly value-neutral two years after closing. The problem was the range of outcomes. The worst 20% of deals accounted for a disproportionate share of the value destruction. The danger of a large acquisition may be less about its expected return than the consequence of being wrong. When you're wrong, you're really wrong. I've seen this plenty of times. I've historically been pretty disciplined about valuation and which deals I'm willing to do, and I've watched industry peers go for the big splash and the big headline, only to end up with value dilution, not creation.
For a large company, a bad $20 million acquisition is painful. Management has to deal with it, shareholders lose money, and some careers may take a hit. But if you're big enough, it's survivable. A bad $2 billion acquisition can define that same company for years. It can impair the balance sheet, consume management attention, drive away good employees, distract from customers, and limit the company's ability to invest anywhere else.
As individuals, most of us wouldn't tie up the bulk of our stock portfolio in one risky, giant swing. Investors call that position sizing. Yet companies do the equivalent in M&A all the time, call it transformational, and pay the price.
Ten $50 Million Deals or One $500 Million Deal?
Picture two companies, each with $500 million to deploy over the next decade. One waits for the right opportunity and makes a single $500 million acquisition. The other makes ten $50 million acquisitions.
The first company makes one bet. One valuation, one management team, one integration plan, and one very large assumption that its view of the future is right. If it misread the market, overestimated synergies, missed a culture problem, or just paid too much, all of its acquisition capital is already committed.
The second company gets nine chances to learn from the last deal. Maybe the first integration exposes holes in diligence. Maybe by the third deal it realizes it's integrating systems too aggressively. By the fifth, it may see one market isn't paying off, stop buying there, and put the remaining capital somewhere better. That flexibility has real value, even though it never shows up in the deal model.
So What Does A.I. Think?
When I asked Claude and ChatGPT about the research, their conclusion was that companies that know "how" to do M&A get better results. Smaller deals done programmatically tend to outperform the big shiny ones, because frequency builds practice from targeting all the way through integration. From operations to finance, an experienced M&A team spots risk earlier, integrates faster and more completely, and doesn't let the deal get derailed by inexperience. Bain's research supports that too: frequent deals build M&A competency, and it's easier to build that competency through a handful of smaller deals than through one big one.
I don't think that's wrong. I just think it's limited. This is where I diverge from AI, somewhat. My hypothesis that frequent small deals beat a single large one is built on competitive advantage and economics.
If a business is buying purely for growth and volume rather than strategic advantage, infrequent large deals get you there. Whether that drives long-term value remains to be seen. High risk, high reward. But if the goal is sustainable competitive advantage, frequent small, strategic deals are more likely to build lasting shareholder value. Essentially, get better, then get bigger. Gain advantage, then get bigger. Fill strategic gaps, then get bigger.
Companies have to win. Heck, nations have to win. And one fundamental truth about winning comes down to advantage. Do you have a supplier advantage? A people and talent advantage? A work ethic advantage? Capability advantages? And do you have crippling disadvantages that will cost you today or tomorrow? Companies that are relentless about telling themselves the truth can use a programmatic approach to do multiple smaller deals that build both M&A muscle and lasting advantage.
There's another reason this works particularly well in private-company M&A: the economics. Smaller companies generally trade at lower valuation multiples than larger ones. That makes it possible to buy several good businesses at reasonable multiples, improve their operations, add management systems, build scale…and fill a competitive gap along the way. Eventually, the combined company may command a higher valuation than the pieces would have on their own. Private equity has used this buy-and-build strategy for decades, and BCG has found substantially higher returns in buy-and-build programs that start with smaller platforms.
Of course, nothing about this is automatic. Buying five mediocre companies at low multiples doesn't make one great company. It just makes a bigger, more complicated mediocre one. But there's a real capital allocation difference between paying a premium for scale that already exists and building some of that scale yourself.
Earn the Right to the Big Deal
This isn't an argument against big deals. Some industries reward scale, and sometimes a big deal brings reach, customers, technology, or efficiencies you simply can't piece together from smaller ones.
Here's the part of the data I love. Companies that were already good programmatic acquirers performed better when they did occasionally take a big swing. So maybe the answer isn't small deals over big ones. Maybe companies need to earn the right to make the big deal. Learn to diligence when a miss isn't fatal. Build the integration muscle through reps. Develop leaders who've actually combined organizations. Then, when the exceptional big opportunity shows up, you're not attempting the most consequential deal in your history with a team that rarely does deals.
So to sum it up…
Frequent deals, many of them smaller, tend to drive higher long-term shareholder value, by roughly 25% over a decade. My suspicion seems to hold up. And it does so through repetition (AI helped me see that), competitive positioning, and economics.
Advantages = Wins