Ensuring there is a capabilities fit between buyer and target is key to delivering a high-performing deal, said PwC recently when releasing results of a study of 800 corporate acquisitions completed between 2010 and 2018.
The 50 largest of the 800 deals involved publicly-listed buyers in 16 industries, according to PwC.
The study finds that capabilities-driven deals generated a significant annual total shareholder return (TSR) premium (equal to 14.2% points) over deals lacking a capabilities fit, the firm pointed out.
PwC defines a capability as the specific combination of processes, tools, technologies, skills, and behaviours that allows the company to deliver unique value to its customers.
Two types of deals were found to outperform the market: capabilities enhancement deals in which the buyer acquires a target for a capability it needs and capabilities leverage deals in which the buyer uses its capabilities to generate value from the target, PwC said.
These represent a true engine of value creation, delivering average annual TSR that was 3.3% points above local market indices, the firm noted.
Deals without these characteristics — limited-fit deals — had an average annual TSR of -10.9% points compared to the local market indices, PwC added.
- While 73% of the largest 800 deals analysed sought to combine businesses that did fit from a capabilities perspective, 27% were limited-fit deals. The analysis shows that for every dollar spent on M&A, roughly 25 cents were spent on such limited-fit deals that in many cases destroyed shareholder value.
- The capabilities premium was found to be positive across all of the 16 industries studied. The share of capabilities-driven deals was highest in pharma & life sciences (92%), an industry where deals often combine one company’s innovation capabilities with another’s strength in distribution.
- Other leading industries in capabilities fit deals were health services and telecommunications (both with 90% capabilities-driven deals) and automotive (86%). Limited fit deals were found to be most prevalent in the oil & gas industry (62%), where asset acquisition can play an important role in addition to capabilities fit.
The analysis shows that the stated strategic intent of a deal, as defined in corporate announcements and regulatory filings, has little to no impact on value creation, PwC observed.
Whether a deal fits or not depends less on stated goals of consolidation, diversification or entering new markets, the firm said.
Geographic expansion related deals perform less well
Deals aiming for geographic expansion notably stood out as performing less well than others, largely because many of them (34%) were limited-fit deals.
More than ever, companies must be clear in defining which capabilities they can leverage to succeed, and which capabilities gaps they need to fill, PwC advised.
“Deal rationales have shifted in a COVID context, reflecting the heightened need for new and different capabilities if an enterprise is to generate value and create sustained outcomes,” said Hein Marais, Global Value Creation Leader, PwC UK. “The need to move quickly increases the pressure to do deals at pace and thereby the risk of failing to evaluate capabilities fit with enough care. Ensuring such capabilities fit, however, dramatically increases the chances of your deal creating value.”