In a radically changed post-pandemic world, characterised by geopolitics, shifting consumer preferences, accelerated digitisation and ESG mandates, the need for speed and agility is heightened, making organic change seem too slow at times. As a result, traditional options of ‘build, buy or borrow’ have tipped sharply towards ‘buy,’ fueling M&A activity; and ‘borrow,’ where companies seek to share capabilities within ecosystems.
A strategy rooted in capabilities is the powerful quality that differentiates successful deals. As such, capabilities-driven companies—whose success comes from having powerful set of capabilities that create unique customer values—on average outperform their peers.
PwC recently examined 800 deals through a capabilities lens, including the 50 largest acquisitions in 16 sectors, to identify which type of deals generated a substantial total annual shareholder return (TSR). TSR from just before the deal’s announcement to one-year post-closing was computed and compared with performance of the leading local market index over the same period.
The deals were classified as follows:
- Leverage deals – acquirer buys a company it knows or believes will be a good fit for its current capabilities. On average, this type of deals gave a premium of 3.9 percentage points (ppts).
- Enhancement deals – designed to bring the acquirer capabilities it doesn’t yet have and will allow it to expand its own capabilities system. Enhancement deals returned on average 2.5ppts.
- Limited-fit deals – occurs when the acquirer largely ignores capabilities; the transaction doesn’t improve upon or apply the acquiring company’s capabilities system in any major way. These deals underperformed on average by 10.9ppts.
Results showed that deal success depended significantly on the capabilities fit between buyer and target and depends less on its aim—i.e., consolidation, diversification or entering new markets.
According to Nishadee Weragala, Associate director for Transaction services at PwC Sri Lanka “It is important for a buyer to ensure that resources they invest produce worthwhile returns. A differentiating factor for successful deals is a capability-focus strategy. PwC helps client identify this and allow companies to deliver better value to all stakeholders “
PwC identified five steps to “capabilities-fit”; a key driver in corporate deal-making:
- Determine capabilities available and required based on company strategy and the way in which the company aims to add value for customers.
- Conduct ongoing portfolio optimisation reviews by (re)examining the portfolio through a capabilities-lens. Points to consider: Is the businesses coherent, i.e., do they leverage a common set of differentiating capabilities? Should businesses be divested because internal capabilities aren’t available to help outperform? Which businesses should be acquired given the company strengths?
- Become a prepared, always-ready acquirer. Build on insights from 1 & 2 to turn M&A effectiveness into a differentiating capability.
- Build distinctive M&A integration insight and capability (tailored specifically to each deal’s unique attributes) which is critical in delivering value from any deal.
- Be decisive and act now. If an acquisition or division doesn’t have a capabilities-fit, protect value and management bandwidth by exiting quickly rather than trying to turn around. Similarly act fast to fill capabilities-gaps, or risk being left behind.
According to Ruvini Fernando, Director Deals Strategy for PwC Sri Lanka, getting the recipe right for deals is critical for long term success. With economic turmoil, both locally and globally, many companies are capitalizing on the crisis and are looking to acquire high quality companies at a bargain. PwC is also assisting Sri Lankan companies enter high growth economies in Africa and South Asia to offset any slowdown locally. “We now see the importance of Sri Lankan companies focusing more on building regional and international competitiveness and focusing on value addition and innovation which drive margins. The resulting enhanced profitability will ensure capital accumulation for future growth” explained Ruvini.
PwC Sri Lanka advisory offers a spectrum of transaction advisory and business restructuring services, working with clients to originate, create, execute, and realise value from deals. Through data driven insights, they help businesses realise value and potential of their M&A, divestitures, restructuring and capital markets transactions.
