The deal pace in 2021 was extraordinary with double the number of transactions than each of the previous four years. Also, the pattern of deals powering forward during an economic recovery bodes well for 2022. Yet, more than half the business combinations done through M&A destroy financial value. How can you position yourself to secure value beyond your purchase price?

One approach to value creation is to focus on capability fit. There are typically five different strategic intentions for a deal: capability access, product extensions, geographic expansion, industry consolidation and diversification. Across all these five, capabilities fit is the key to value creation. This can happen in two main ways. Leveraging the acquirer’s capabilities to strengthen the target is usually the most value-additive approach. Cisco grew for years this way, purchasing smaller companies and bringing a disciplined approach to sales and customer penetration with a wide array of networking solutions. Acquiring capabilities can also add value. Amazon’s purchase of Whole Foods gave Amazon the knowledge base in brick & mortar stores within the grocery industry. This enabled Amazon to move the grocery industry online, which had eluded well-funded players for decades.

An Example

A former client case demonstrates both the promise and challenges with capability fit.  My client, a regional CPA firm, also had a board range of service offerings, including audit, compilation and reporting, business valuation, wealth management, information technology consulting, tax, internal controls, general business consulting, and even investment banking. It’s traditional M&A strategy was to buy small firms and then cross-sell to its new clients. By leveraging the cross-sale capabilities, it could quickly double the revenue of those new clients. At one point, this client was able to “acquire” a significant number of partners and managers from a Big 4 CPA firm. These partners had a different model of how an audit firm operates, and the integration was not easy. For example, agreements about even the role of a partner were needed. At a large firm, partners sell and manage relationships. At small firms, partners sell and also perform most of the billable hours. Solving this and a myriad of other issues so that everyone at this firm could get back to the core capabilities of selling and delivering high quality professional services took the help of my consulting work over a period of six months.

Five steps are essential to adopt capabilities fit approach to M&A

  1. Identify the capabilities you have and the ones you need. What is your strategy for bringing value to your target customers—and at which core processes must you excel to create that value?
  2. Conduct portfolio reviews through a capabilities lens. Do your product and business lines leverage a common set of core capabilities which differentiate you from your competitors?
  3. Become a ready to move acquirer. Build on the knowledge from steps 1 and 2 to create a strong capability to identify and secure attractive targets.
  4. Excel at M&A integration. Integration is absolutely critical to deliver value from a deal. It’s all about the execution across strategy, structure, process, technology, people bandwidth and culture. Change management needs to be started before legal day one.
  5. Act now. If you are struggling with an acquisition, decide if it can be salvaged or exit quickly. If there is a gap in your capabilities, fill those gaps before taking on challenges that cannot be met.

Timothy Swords leads the M&A practice in the 2GO Advisory Group. Reach out to learn how we can support you preparing for, negotiating and integrating mergers, acquisitions and divestitures.

As a board director, management consultant and corporate executive, Timothy has 30+ years of experience in driving strategy, business transformation and scale across diverse industries. He is a high-level thinker, while also able to dive deep to understand the root cause of issues and potential solutions for management to consider.