Capabilities fit most important aspect of acquisitions

Doing the right deals

Capabilities are more important than ever for the success of a deal. The chances of more value creation are greater if there is a good match between the buyer and the target in terms of people's skills, company culture, existing technologies and processes.

According to new global research by PwC organisations looking for growth in the post-COVID age, this capabilities fit between buyer and target is key. Our analysis shows that the wrong starting points are too often used in many major acquisitions.

Long-term value creation

'The path to recovery from the corona crisis is through value creation,' says Gert-Jan van der Marel, partner at PwC and responsible for the theme ‘value creation'. 'By strategic reorientation, digital transformation and paying more attention to human potential, the focus is placed on long-term value creation. Mergers and acquisitions will be an important instrument to accelerate value creation in the coming years. But organisations will need to take a more holistic approach to value.'

Capabilities premium

For our study Doing the right deals we looked at the fifty largest deals with listed buyers in sixteen sectors. We identified the characteristics of the most successful acquisitions, measured by the annual total shareholder return (TSR). This showed that an acquisition mainly creates value if both parties' unique business characteristics reinforce each other or are leveraged.

On the other hand, stated strategic intent, as is often mentioned in the announcements of mergers and acquisitions, has little or no impact on value creation. A good match is determined to a lesser extent by plans to consolidate, diversify or enter new markets.

But the biggest pitfall is the 'limited-fit deal'. In such an acquisition, the buyer barely looks at the unique business characteristics, and the transaction hardly ever improves the buyer's business capabilities. Of the acquisitions studied, 27 per cent were a limited-fit deal. Our research shows that capabilities-driven deals provide a significantly higher TSR premium (14.2 percentage points) over deals lacking a capabilities fit.

Five steps to maximise the value of deals

Determine the current unique capabilities of your company and the ones you need. - What capabilities do you need to remain valuable to your stakeholders as a company? Where are the gaps in your organisation? Once you know that, you can decide how to fill them: develop yourself or achieve growth through a merger or acquisition.
Continuously optimise your portfolio. - View your portfolio continuously from a capabilities perspective. Do your business units still fit together? Are there any units that you would do better to dispose of?
Make sure you're always ready to acquire a party. - Continue to build on the insights from the first two steps to ensure an effective acquisition policy.
Build up distinctive insight and strength for M&A integration (MAI). - A previous PwC study showed that MAI is very important to creating value in deals, but that every deal calls for a different approach.
Be decisive and act quickly. - If a business unit does not fit in with the desired characteristics, be quick to dispose of it, rather than trying to change that unit and losing value. Conversely, the same applies: if there is a gap in your portfolio, you must act now to fill it. Otherwise, you will find yourself lagging behind your competitors.