The Capabilities Premium in Mergers & Acquisitions
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 by management consulting firm Booz & Company. The study looked at 320 transactions that took place between 2001 and 2009 in eight industry sectors including chemicals, healthcare, and industrials, calculating shareholder return over the two years post-close and incorporating post-close performance data from 2001 to 2011.
These transactions included, among others, Novartis' acquisition of Alcon, which leveraged Novartis' capabilities in science-driven innovation to further develop Alcon's contact lens and eye medicine business. 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. Although some industries had stronger results than others (Fig. 1), all industries studied showed significant performance premiums for capabilities-driven transactions. 
To isolate potential M&A success factors, the study divided the deals by their stated intent (Fig. 2-4), thus capturing the prevailing view of the purpose of each deal. Five classifications of intent were used: The goal of Capability Access deals is to appropriate some capability that the target company had and that the acquirer wanted or needed. In Product and Category Adjacency deals a company bought a business with a product, service, or brand related to, but not identical to, its existing business categories. Johnson & Johnson's acquisition of Pfizer's over-the-counter drug division (Pfizer Consumer Healthcare) in 2006 was a well-known deal of this sort. The idea behind Geographic Adjacency deals is to use M&A to expand into a new location.
Consolidation deals are intended to take advantage of synergies and economies of scale, usually between two companies with similar businesses. Diversification deals allow companies to enter a new or unrelated sector, typically with the rationale of insulating results against the business cycle. We then crosscategorized the deals by their capabilities system fit. 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. 
Source: Booz & Company
