Lessons Learned From the Best Post-Transaction Performance Awards

Lessons Learned From the Best Post-Transaction Performance Awards

Last week we announced the recipients of the 2024 Best Post-Transaction Performance Awards as part of our Excellence in Acquisitive Growth Awards series. Tetra Tech (Pasadena, CA) (ENR #3) is this year’s recipient in both the $50 million-plus and $10 million to $50 million size categories. KCI Technologies (Sparks, MD) (ENR #56) is the Award recipient in the $10 million or less size category. 

Post-transaction performance headlines: Now in its second year, the Best Post-Transaction Performance Award continues to reveal just how good the AE industry’s best acquirers are at creating positive outcomes for shareholders, clients, and employees through their acquisitions. Here are four lessons from two years of post-transaction performance data:

• The best acquirers know how to increase profits: An examination of each of the four performance metrics that comprise the Acquisition Performance Indicator (API) (more on this below) shows that 95% of acquisitions result in an increase in profits within one year of the transaction being completed. The median reported increase in profits is a robust 78%. About one-third of Award applicants reported profits at least doubling in the year after a transaction. 
• Boosting sales through acquisitions: One of the big lessons learned from the two years of performance data is the ability of acquirers to ramp up the fee backlog attributable to their acquisitions. Three-quarters of acquisitions resulted in an increase in backlog, with the median reported uptick being 28%. Twelve percent of acquirers reported backlog more than doubling a year post-transaction. 
• Top-line growth: The median reported increase in revenues one year post-transaction is 22%. Almost all (95%) Award applicants reported an increase in revenues one year post-transaction. Eight percent of applicants reported a doubling or more of revenues. When you combine the median increase in backlog from acquisitions (28%) with the median increase in revenues, you can see why acquisitions are so important for leadership teams and investors that demand fast growth. 
• Acquisitions and employee engagement: This second year of data reinforces what we learned last year. Acquisitions are an excellent way to boost employee morale and engagement. On average, acquirers have been seeing voluntary turnover rates decline by almost one-fifth a year into their transactions. One reason for this is that most acquisitions are creating more opportunities for employees post-transaction. Another is that acquirers are bringing improved benefits to employees at a lower cost to them.

A deeper dive on performance: This particular Award allows industry decision-makers to better understand and benchmark the post-transaction performance of acquisitions using Morrissey Goodale’s groundbreaking Acquisition Performance Indicator (API). The API takes a holistic view of an acquisition, assessing performance in the areas of revenue, profit, backlog, and voluntary turnover in the 12 months following the transaction date. The revenue and profit elements indicate top- and bottom-line improvements—and speak to return on investment. The backlog element is an indicator of sales and marketing improvements. The voluntary turnover element reflects improvements in employee engagement and a direct reflection of integration success. An API analysis of the three size categories yields some interesting results. 

• $10 to $50 million API analysis: For the second year in a row, acquisitions in the $10 to $50 million size range exhibited superior post-transaction performance characteristics than those in the two other size categories. The average API in this size range was 4.44—compared with 2.37 in the $50 million-plus category and 1.57 for acquisitions smaller than $10 million. On average, acquisitions in this size range saw revenue increases of 59%, profits more than doubling, backlog increases of 81%, and a 25% reduction of voluntary staff turnover rates. Combined, these improvements delivered outstanding returns for shareholders. One reason for this is that the buyers in this size category tend to be larger (median size $450 million) with highly skilled corporate development and integration functions. All of the acquirers in this category were either publicly traded or have private equity in their capital stack.
• $50 million-plus API analysis: Acquisitions of firms with revenues in excess of $50 million performed positively in the first year post-transaction, but didn’t yield the same across-the-board APIs as those in the $10 to $50 million category. Not surprisingly, the acquirers of firms in this size range were some of the largest in the industry (median size $1.15 billion). All were either publicly traded or had a financial sponsor. All have very experienced and accomplished corporate development and integration teams. The average API in this size category was 2.37. On average, these acquisitions yielded revenue increases of 16%, a near doubling of profits, a 36% increase in backlog, and a 16% reduction of voluntary turnover. Why are these one-year APIs and gains somewhat less than those in the $10 to $50 million size range? Primarily because it’s harder to drive enterprise-wide improvements in all four performance areas at this larger scale in year one post-transaction. 
• Less than $10 million API analysis: Acquisitions of firms less than $10 million in revenues tended to have the weakest one-year post-transaction performance indicators. The average API in this size category was 1.57. On average, these acquisitions yielded revenue increases of 25%, profit increases of 91%, backlog improvements of 21%, and voluntary turnover rate reductions of 20%. This category saw some instances of negative post-transaction performance. The acquirers in this category were a blend of employee-owned and private equity-backed firms with a median size of $270 million. Most of the acquirers in this category did not have an experienced corporate development team and/or integration team. And many have made fewer than a handful of smaller acquisitions over the years. So, while overall the return on their acquisitions has been positive, it’s not surprising that the gains lag those of the other two size categories where the acquirers tend to be more prolific and proficient. 

Connections and sharing best practices: We’ll be discussing all things M&A and sharing our latest data and findings at the Texas and the South M&A and Business Symposium in Houston later this month.

To contact Mick Morrissey, you can email him at [email protected] or call/text on 508.380.1868.