During the last 10 years, leading CPG companies have begun organizing their businesses around distinctive capabilities systems. Their improved performance reflects the wisdom of this strategy. One of the most influenced aspects of their business is their choice of merger and acquisition targets. The old quests for size and geographic expansion are no longer as compelling; the truly game-changing deals are those that move CPG portfolios toward greater coherence.
Recently, we evaluated the top 50 M&A deals by transaction value in the consumer staples industry since 2002. We classified the rationale of each transaction as either capability building (leveraging one or both companies’ distinctive capabilities), diversification (moving away from the core business into an unrelated area), or scale consolidation (expanding in the same market to capitalize on economies of scale and synergies). For each deal, we also assessed performance one and two years after the deal announcement. Companies enjoying returns in excess of the S&P 500 index returns one year out were deemed “winners” and those lagging behind the S&P were determined to be “losers.”
Notably, there were no diversification plays among these transactions. This suggests that consumer products companies have recognized the cost of incoherence. We found that 32 deals were done for scale consolidation, and only 18 for capability building. Based on financial performance, 67 percent of the capability-building transactions were deemed winners — including Clorox’s purchase of Burt’s Bees, Reynolds’s purchase of Conwood, Kraft’s purchase of Cadbury, and Coca-Cola’s purchase of Energy Brands — whereas only 44 percent of scale consolidation deals beat the S&P 500 one year out.
Furthermore, the performance gap widens over time. Capability-building plays, on average, returned to shareholders a 15.4 percent increase in the value of their investment after one year, versus 4.8 percent for scale consolidation transactions. Two years out, capability-building returns were nearly 25 percent on average, versus negligible returns (0.1 percent) on scale consolidation moves.
Almost certainly, the number of mergers and acquisitions in the CPG industry will increase during the next few years. As they evaluate M&A candidates, CPG company leaders need to apply a lot more emphasis up front to assessing the capability benefits of a deal. The increasing complexity of consumer markets requires greater skill, not scale. The critical question to ask when deciding on a deal is, Does this acquisition bring in complementary capabilities that fit into one capabilities system and make the combined portfolio more coherent?
That investigation does not close with the transaction. Many times, companies have discovered a deal’s hidden gems only after the due diligence is concluded and the merger completed. Realizing the full value of these hidden gems requires an open, thoughtful, and adaptive integration process.
- J. Neely is a Booz & Company partner based in Cleveland. He specializes in mergers and restructurings in the consumer products, retail, and industrial sectors.
- Paul Leinwand is a partner with Booz & Company based in Chicago, and the coauthor (with Cesare Mainardi) of The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011).
- Amit Misra is a principal with Booz & Company based in Chicago.