Editor's Note:Conor Johnston is a Managing Director in the Corporate Performance Improvement practice at international consulting firm Alvarez & Marsal's Houston office. The views expressed in this article are solely those of the author.

Interest rates aside for the moment—M&A deals are once again becoming the preferred tool for executives seeking to create shareholder value. However, despite the seemingly simple logic of "buying growth," most deals fail to create value and instead destroy it.

Since the Federal Reserve began raising interest rates in 2022, the M&A market cooled, but over the past year,announcements of large corporate dealshave become frequent again. Facing flat or even broadly declining stock prices, companies are seeking strategic transactions to boost shareholder returns, with M&A being the primary tool.

In theory, the M&A logic holds: the combined market share of two merged companies is necessarily greater than that of a single company. Coupled with the cost synergies achievable through operational efficiency improvements post-merger, M&Aappearsto be an excellent way to enhance returns. After all, what would Google be without YouTube? What would Facebook be without Instagram? Major acquisitions have completely transformed how these companies reach new customers. The problem is that these success stories are not the norm but the exception to the rule. For most companies, M&A does not work—at least not to the extent management expects.

Data shows that70% to 75% of M&A deals fail to meet expectations, usually because buyers overestimate the value of the acquired assets and fail to achieve the expected synergies. While stock prices may briefly rise in the early announcement period, months later, most companies' stock performance is flat or even slightly lower than before the deal was announced. After spending millions on due diligence and legal fees, companies painfully realize: they are not the exception to the rule, and M&A is not a magic bullet for growth.

If so, why do companies still rush down the M&A path? What is the reason?

One key factor is that the environment executives operate in is pushing them toward this "big move" strategy. For example,the shift toward stock-based compensation plansmeans executive rewards are tied to specific stock prices, shareholder returns, or quarterly earnings metrics.

Meanwhile, the average tenure of CEOs has shortened significantly over the past decade, currently averagingjust over four years. Activist investor activity is also intensifying, with engagement reachinga six-year high in 2024。

. With these factors intertwined, CEOs entering the executive suite face a limited time window to prove their worth, greater external pressure, and the temptation of higher compensation if they can boost the stock price within their tenure.

In this context, a deal seems reasonable: if you might be pulled from the game before even scoring, why waste time hitting a single or a double? Why not just swing for the fences and hit a home run?

This has almost become a cycle: companies pursue a merger, the merger fails, and companies are forced to find alternatives to appease disappointed markets. So they begin buying back stock, announcing restructurings, or shrinking back to core businesses—strategies that could have been more precisely applied directly when initially formulating their market strategy.

In recent years, several companies have played out similar scenarios. One oilfield services company, after a failed merger, saw its shareholder return drop from 1.2% to 0.48% despite efforts to pivot and focus on operational execution improvements. Another diversified industrial and technology company, after cost and compliance issues spiraled out of control, sold off recently acquired business units and reinvested in core growth areas.

M&A is an extremely expensive path where companies pay a high price only to end up back where they started. Therefore, companies must abandon the notion that "buying growth is more effective thancreating profit."

Companies seeking to enhance shareholder returns should first focus on core business capabilities and pursue long-term,sustainablegrowth.

Specifically: first, clarify the core business markets and the adjacent areas that exist within the portfolio. Second, review the portfolio item by item, target low-margin businesses, and clarify where overall margin performance can be improved. At the same time, closely monitor the customer journey and understand their purchasing decisions to optimize the company's go-to-market strategy. If an immediate boost is truly needed, consider alternatives such as stock buybacks.

While executives certainly need to refocus on profit creation, boards are equally responsible. To avoid every new CEO trotting out the same short-term stock-boosting playbook, boards should stop rewarding executives with short-term stock incentives and instead tie incentives to the overall health of the company.

Growth through M&A may look good on paper and even benefit some in the short term. But a company's long-term success and its shareholder returns begin with a deep examination of the core capabilities that drive a healthy bottom line—a task requiring the joint participation of executives and boards. Market pressures push companies to chase quick fixes, but only by focusing on sustained growth within the existing portfolio can companies truly achieve long-term success.