BUSINESS SPECIAL.................. M&A Deals That Win

M&A Deals That Win

Twelve years of data shows that mergers and acquisitions that apply or enhance capabilities produce superior returns.

 The Capabilities Premium in M&A

An interactive look at the deals examined in this study, including information on their capabilities fit, deal size, and two-year annualized TSR.

In May 2015, industrial conglomerate Danaher agreed to buy the Pall Corporation, a maker of biopharmaceutical and medical products, for US$14 billion. Although it was far from the biggest deal of 2015 — plenty have dwarfed it — Danaher–Pall attracted a lot of attention from those who work in corporate mergers and acquisitions. The deal is intriguing for two principal reasons. First, Danaher announced it would split into two companies after the transaction, one focused on manufacturing and the other on life sciences and diagnostics, each company possessing a unique capabilities system. Second, this was the largest transaction ever completed by this highly active, highly competent acquirer. Danaher has made more than 400 acquisitions over the last 30 years, and a startlingly high percentage of them have worked out well.

Danaher’s success in M&A stems from the fact that it knows its area of greatest strength — an approach to continuous operational improvement known as the Danaher Business System — and concentrates on targets that can benefit from it. Put another way, Danaher is a capabilities-driven acquirer that leverages its capabilities across its many acquisitions. And as it turns out, focusing on targets that leverage one’s capabilities provides the greatest chance of M&A success, not just for Danaher but for any big company at just about any point in time.

Focusing on targets that leverage one’s key capabilities provides the greatest chance of M&A success.

This is the main lesson that emerges from Strategy&’s most recent study on the role of capabilities in M&A success. When we examined 540 major global deals in nine industries announced between 2001 and 2012, we found that deals that leveraged the buyer’s key capabilities or helped it acquire new ones produced significantly better results, on average, than local stock market indexes in the two years following the deal. And they produced better results than deals done with other rationales in mind. The overall premium for capabilities-driven deals above other types of deals was a 14.2 percentage point compound annual growth rate— even higher than the first time we did the study, in 2012, when we analyzed transactions that took place between 2001 and 2009. This year’s study was also more comprehensive, and included hundreds of deals that weren’t in the original study.