According to McKinsey, paper and packaging companies should pursue multiple smaller deals throughout the year, rather than large acquisitions, to achieve growth, increase returns, and overcome industry disruption.
In a recent article, McKinsey indicates that volatile demand, rising prices, and changes in customer mix are stifling growth as companies struggle to maintain strong volumes. Total shareholder returns are reported to have averaged at 10% between 2009 and 2014, but declined to 6% over the next five years – and fell to 1% CAGR between 2020 and 2024.
In part, this outcome is attributed to the COVID-19 pandemic. Other macroeconomic factors include slowing GDP growth, lower consumer demand for discretionary items, durable goods, and industrial products; inflated costs of production inputs; uncertainty around interest rates; and a broad-based destocking of inventory.
McKinsey suggests programmatic M&A – a strategy in which a company makes more than two small or midsized deals in a year, targeting a median of 15% market capitalization – as a potential solution to robust sector performance, volume growth, and enhanced competitiveness.
With McKinsey previously observing that packaging companies were operating in eight to ten different businesses, often across multiple industry subsectors, it now argues that taking a programmatic approach to mergers and acquisitions will improve the likelihood of delivering value in the long-term.
For the paper and packaging sector in particular, deal volumes are said to have peaked in 2018. There was a noticeable downturn in 2020, and while volumes have since increased, they are yet to reach the same pre-COVID highs.
Meanwhile, McKinsey notes that average deal size has increased in recent years, which indicates a trend of larger and more strategic transactions. Larger acquisitions have also been largely or fully financed with stock (equity) rather than cash or debt, the article observes.
In the context of rising interest costs and tightening credit markets, McKinsey believes that the rise in equity financing reflects buyers’ interest in sharing both risk and upside with sellers.
The article goes on to say that companies are increasingly using ‘roll up’ strategies, in which multiple smaller packaging companies or converters are bought and combined into one consolidated platform. This approach tends to focus on one or two key product lines.
Apparently, companies that choose to make smaller acquisitions believe these deals are easier to integrate, less risky to execute, and well-suited to incremental increases in capabilities over time.
In a survey among C-level and senior executives of paper and packaging companies, over 80% told McKinsey that they expect M&A activity to increase in the coming years.
Respondents expressed a general interest in pursuing deals below $1 billion in the coming years, even if they come at a premium. Nearly 50% said they would pay a premium of 20-25% for the right assets.
McKinsey adds that companies are largely considering M&A to consolidate core markets and build scale. Operations, customer relationship management, and speed integration are considered the biggest contributors to success in M&A.
Executives in packaging subsegments told McKinsey that sustainability and healthcare are highly valued, with scale perceived as a ‘key lever’ in sustaining returns. They underlined that deals often fall short of their expected value when the company loses critical talent, while cultural misalignment and unclear operating norms were said to slow integration and dilute execution momentum.
McKinsey also analyzed the performance of around 100 companies in the same industry between 2010 and 2024. Its findings imply that those who delivered median total shareholder returns of 12.2% pursued multiple deals in a ‘tailored and disciplined execution approach’.
These ‘top-quartile performers’ reportedly undertook high M&A deal activity, executing two to three times more acquisitions than their peers. Approximately two-thirds of these companies’ deals were programmatic, McKinsey says, while lower-quartile companies made infrequent deals with limited follow-through.
Companies that focused on programmatic M&A also achieved almost four percentage points of excess annual shareholder returns compared to those pursuing opportunistic deals or organic growth, which were said to deliver negative excess total shareholder returns.
Other benefits for companies taking a programmatic approach include an almost 4% increase in annual revenue growth, ~27% higher gross margins, and almost 13% better returns on invested capitals, the article argues.
McKinsey uses the example of an American packaging company acquiring a handful of smaller companies focused on high-margin, value-added components like closures and dispensers. Since these segments combine recurring demand, defensible intellectual property, and customer stickiness, the company apparently saw improved multiples, stronger buy-side sentiment, and improved credibility in its long-term growth agenda.
However, the application of programmatic M&A in the paper and packaging industry has apparently been limited. Companies are thought to lack a clear and specific M&A blueprint, and sometimes a proactive M&A sourcing engine and partner ecosystem for early deal access.
Furthermore, industry players may be reluctant to build or invest in deal models that, according to McKinsey, could offer a competitive edge in the sourcing stage. They are not thought to be investing in the relevant integration capabilities to increase speed of execution.
Successful packaging companies have reportedly adopted a ‘rigorous’ resource and capital management strategy, ‘robust’ valuation practices, and a ‘customer-centric’ approach to integration.
Integration can also be challenging in the packaging industry, as mergers are sometimes cross-continental and may require major adjustments, including infrastructure changes like mill conversions.
McKinsey recommends that companies address these issues by defining their integration strategy before the deal is closed. This involves choosing whether to integrate centrally or preserve a franchise structure.
Companies are further advised to anchor the operating model in the deal rationale prior to closing; this means distinguishing between scale, roll up, or adjacency. This is set to ensure that the integration phase is not build on a one-size-fits-all approach, instead supporting the deal’s value creation plan.
Successful companies are also seen to track their progress through clear financial, operating, and process metrics – and to communicate with all stakeholders throughout the deal process.
“Programmatic M&A may not be the answer for all companies and industries,” the article summarizes, “but given the modest growth and fragmented structure of the paper and packaging industry, this approach may be the most effective for companies looking to enhance returns, growth, and innovation.
“Successfully sourcing and executing a series of deals is no easy task. Paper and packaging companies need to invest time and resources in strengthening their M&A capabilities and operational practices. Doing this well can lead to improved revenue growth, higher profit margins, and better returns on invested capital.”
Last year, Packaging Europe spoke to Anna Perlina, sustainable packaging consultant at Integrity Solutions, to learn more about how companies can harness the Packaging and Packaging Waste Regulation to grow their businesses.
McKinsey also published research presenting six barriers companies face when considering sustainability-minded packaging materials, including performance concerns, limited market supply, and different definitions of sustainability.
In more recent news, Henkel announced that it would acquire Stahl for an enterprise value of €2.1 billion in hopes of driving growth in specialty coatings for flexible materials.
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