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M&As are vital for successfully rebalancing portfolios

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This year, in the face of a potential slowdown in the economy, consumer packaged goods (CPG) and retail companies will use mergers and acquisitions (M&As) to rebalance their portfolios, letting go of noncore assets and reinvesting in the capabilities they need to stay relevant to the ­consumer.

This drive towards a comprehensive portfolio management comes as a result of several years of anemic growth and a looming slowdown in the economy.

That’s the overarching conclusion of “Fortifying Before the Storm,” the fourth edition of the “A.T. Kearney Consumer & Retail M&A Report.” The report’s conclusions are based on a proprietary analysis of M&A transactional data and more than 100 C-suite-level CPG, retail and private equity (PE) executives’ answers to crucial strategic and financial questions, analysis of Dealogic transaction data from 2007 to 2018, and conversations and analysis between more than 10 A.T. Kearney partners and principals.

Three key themes emerge from A.T. Kearney’s analysis:

• Companies plan to use new capabilities to fortify their portfolios. CPG and retail executives indicated a willingness to invest in several missing capabilities including last mile delivery, digital/data science and e-commerce.

• Divestiture of noncore assets. Four out of five executives believe divestitures will rise in the next 12 months, driven by this same need to rebalance portfolios while taking advantage of high multiples.

• A shift towards local decisions. Maintaining a global portfolio in an era of changing consumer preferences combined with lasting trade uncertainty requires a change in business model for international players, from a global way of thinking to multi-local.

Students of the 2019 M&A market should look for investors increasing their focus on the acquisition of smaller, disruptive companies. While the volume of midsize deals fell 4%, those deals increased 6% in value as investors looked to deals with bold, challenger retailers to integrate change agents — in the form of new brands, new customers, new concepts, new capabilities and new talent — at lower cost and risk.

Multiples look to remain high. The spread between CPG and retail multiples is shrinking, going from 33% in 2017 to 4% last year. These gains were underpinned by improvements in channel strategy and consumer experience and increased convergence from retail to CPG, the largest noncore M&A category in volume for retail, and to health care, the largest noncore M&A retail category in value.

Scope deals replace scale deals

2018 saw a pronounced shift away from scale deals. M&A activity has continued to shift to a focus on building competencies as companies realize they are missing critical components in their portfolios, mostly in digital and e-commerce, analytics or operational capabilities necessary to omnichannel experience such as last-mile delivery and flexible supply chain. This shift in strategic mindset explains the rapid refocus of M&A towards more disruptive, but also often smaller and younger companies rather than megadeals — a key trend last year. Valuations are reflecting this trend, as companies below $25 million are now trending at EBITDA (earnings before interest, taxes, depreciation and amortization) multiples about 10% higher than those valued between $25 million and $1 billion. Large deals remain relevant, but for high-quality assets only (EBITDA multiples for companies above $1 billion in valuation are at a five-year high, but volume decreased in 2018).

Successful incumbents understand this trend and have doubled down on M&A.


Successful companies that are rewarded with higher valuation have clear long-term strategies and don’t flip-flop to satisfy short-term objectives. It is therefore imperative to develop an M&A strategy that intertwines with the overall business objectives.

Strategic focus in CPG and retail companies has shifted gradually — but rapidly — from building market share and economies of scale to offering a differentiating customer experience. Legacy companies understand that Millennial and Gen Z shoppers comprise a new, more sophisticated consumer base, and one that needs to be approached through a new set of skills. For many companies, M&A is the right vehicle to acquire such skills, therefore 2019 should be seen as the year to strengthen the portfolio, acquire missing and new capabilities, and reallocate capital to fortify before a looming market ­downturn.

Bahige El-Rayes is a partner in the consumer and retail practice and Alexandre Terseleer is a manager in the PE/M&A practice of global strategy and management firm A.T. Kearney. They can be reached respectively at [email protected] and [email protected].


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