Executive Briefings

Most 2011 M&A Deals 'Will Backfire' Unless Merger Strategies Center on Building Capabilities, Not Diversification

With trillions of dollars in cash on their balance sheets, many of the world's largest companies will make significant acquisitions during the balance of 2011. Experts are predicting vigorous global M&A activity, with the dollar volume of deals increasing by more than a third from last year, nearly matching the biggest year ever, 2006. But money and opportunity are only a small part of a winning M&A strategy.

According to Booz & Company research among hundreds of deals across multiple sectors, including healthcare, utilities and consumer staples, the most successful M&A strategies are geared toward leveraging the distinctive capabilities of one, or both, companies; they're not geared primarily for diversification. In all three sectors analyzed, the results were the same: Deals done to add capabilities had significantly more winners than losers (ranging from 38 percent to three times more winners than losers, depending on the sector).

Deals done for the purpose of diversification, however, were more likely to fail than to succeed (up to 40 percent more losers than winners, depending on the sector). The data make it clear that a capabilities-driven M&A strategy is one of the surest ways to make the most of the money, energy and time that global companies are expected to devote to deal making this year, according to Booz & Company partners Gerald Adolph and Paul Leinwand.

"It's no surprise that M&A strategies with a capabilities lens outperform others: In today's competitive marketplace, companies that have a winning set of capabilities create significantly more value than their peers -- and M&A is one vehicle for making sure that you have the right capabilities and right portfolio that leverages what you're great at," said Adolph.

"Winning companies align their strategic direction to the capabilities that make them unique. They make hard choices about differentiation and stick to them. They understand that differentiating capabilities are more valuable than assets like facilities, equipment, and even brands. They apply a capabilities lens to all their acquisitions: they only consider those targets that strengthen their own capabilities system or that bring along a market that can benefit from what they do particularly well," Leinwand said.

Source: Booz & Company

With trillions of dollars in cash on their balance sheets, many of the world's largest companies will make significant acquisitions during the balance of 2011. Experts are predicting vigorous global M&A activity, with the dollar volume of deals increasing by more than a third from last year, nearly matching the biggest year ever, 2006. But money and opportunity are only a small part of a winning M&A strategy.

According to Booz & Company research among hundreds of deals across multiple sectors, including healthcare, utilities and consumer staples, the most successful M&A strategies are geared toward leveraging the distinctive capabilities of one, or both, companies; they're not geared primarily for diversification. In all three sectors analyzed, the results were the same: Deals done to add capabilities had significantly more winners than losers (ranging from 38 percent to three times more winners than losers, depending on the sector).

Deals done for the purpose of diversification, however, were more likely to fail than to succeed (up to 40 percent more losers than winners, depending on the sector). The data make it clear that a capabilities-driven M&A strategy is one of the surest ways to make the most of the money, energy and time that global companies are expected to devote to deal making this year, according to Booz & Company partners Gerald Adolph and Paul Leinwand.

"It's no surprise that M&A strategies with a capabilities lens outperform others: In today's competitive marketplace, companies that have a winning set of capabilities create significantly more value than their peers -- and M&A is one vehicle for making sure that you have the right capabilities and right portfolio that leverages what you're great at," said Adolph.

"Winning companies align their strategic direction to the capabilities that make them unique. They make hard choices about differentiation and stick to them. They understand that differentiating capabilities are more valuable than assets like facilities, equipment, and even brands. They apply a capabilities lens to all their acquisitions: they only consider those targets that strengthen their own capabilities system or that bring along a market that can benefit from what they do particularly well," Leinwand said.

Source: Booz & Company