Mergers & Acquisitions Built Around Companies’ Distinctive Strengths Significantly Outperform Other Deals
Capabilities-driven transactions generated 12 percentage points of annual shareholder return above other deals.
Mergers and acquisitions designed from the start to enhance or leverage companies’ distinctive strengths significantly outperform transactions that are not capabilities-driven, according to a new study released today by global management consulting firm Booz & Company.
“This study demonstrates an important truth about mergers and acquisitions that is critically important to anyone considering growth through inorganic means: Structuring transactions with capabilities in mind can result in deals that outperform peers and that avoid ‘adjacency traps.’ This fact has never been more important than today, when well-trodden strategies such as seeking cost synergies represent little more than table stakes. Companies must dig deeper for successful deals, and their tool of choice should be capabilities fit,” said Ahmed Youssef, Partner at Booz & Company.
Specifically, the study found that transactions designed to enhance or leverage core capabilities produced an additional 12 percentage points of annual shareholder return, on average, compared to deals with limited capabilities fit.
The study looked at 320 transactions that took place between 2001 and 2009 in eight industry sectors, calculating shareholder return over the two years post-close and incorporating post-close performance data from 2001 to 2011. These transactions included Google’s acquisition of DoubleClick, which enhanced Google’s own capabilities by providing it with access to a leading display ad platform, and Novartis’ acquisition of Alcon, which leveraged Novartis’ capabilities in science-driven innovation to further develop Alcon’s contact lens and eye medicine business.
“We came up with the idea for this study based on our efforts in helping clients analyze prospective acquisitions and on our work with them to realize value during the post-merger integration process. One fact kept jumping out at us: When deals outperformed, the acquirers had used capabilities as a central theme in analyzing target companies, exploring what they themselves did well first and then looking for a good fit with those strengths. It seemed logical that market-performance data should bear out what we had seen in the field. And, in fact, it has,” said Cesare Mainardi, Chief Operating Officer and CEO-elect at Booz & Company.
One such transaction included SABIC/GE Plastics. “This deal accelerated SABIC’s strategy to increase the share of specialty chemicals in its product portfolio, and provided SABIC with access to the capabilities of a global leader in engineering plastics”, said Ramy Sfeir, Principal at Booz & Company. “In particular, SABIC leveraged GE Plastics’ expertise across a number of capabilities including sales and marketing of specialty products, its innovation track-record as well as its technological know-how. The deal also allowed SABIC to gain access to new customers and markets for its historical products.”
Although some industries had stronger results than others, all industries studied showed significant performance premiums for capabilities-driven transactions. The eight industries surveyed were chemicals, consumer staples, electric utilities, healthcare, industrials, information technology, media, and retail.
When taken together, the study found that transactions leveraging capabilities generated greater improvement in annual total shareholder return (+3.9 percentage points compared with market indexes) than those enhancing capabilities (+0.4 percentage points). Both of those outperformed deals with limited capabilities fit (-9.1 percentage points). Leverage deals are those in which the acquirer applies its current capabilities system to incoming products and services, and enhancement transactions are those in which the buyer acquires new capabilities to fill in gaps or respond to market changes. Limited-fit deals don’t improve or apply the buyer’s core capabilities in any major way and often bring the buyer products or services that require capabilities it does not have.
“The findings from this study agree perfectly with our core belief about what constitutes a company’s true enabler of profitability, value creation, and competitive advantage: its capabilities system. A company that connects what it does better than anyone else to how it creates value for customers and what it sells will systematically outperform its competition. Such a company will invest in a few essential capabilities, spend less elsewhere, have a clear lens to prioritize investment and be aligned on what really matters,” added Youssef.
For more information on capabilities-driven strategy, please see the following:
The Booz & Company study is based on the analysis of 320 M&A deals that took place between 2001 and 2009 in eight industry sectors. It measures deal performance by comparing the total shareholder return of each acquiring company for the two years after the acquisition’s completion with the TSR of the large-cap index in the country where it is based. Those indexes are the S&P 500 in the U.S., the FTSE 100 in the U.K., the CAC 40 in France, and the DAX in Germany. The data have a margin of error of plus or minus 6 percentage points.