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 / Spring 2012 / Issue 66(originally published by Booz & Company)


The Capabilities Premium in M&A

The capabilities orientation is particularly valuable in M&A transactions, when time is often short and the stakes high. Executives who understand their companies’ capabilities system end up with a reliable and rapid guide to sound judgment. When a seemingly attractive prospect comes along that doesn’t fit, they recognize it in time to avoid a mistake. When a deal fits, they have a more solid basis for evaluating the right price. And during the execution of the merger, they are in a better position to gain value.

Matching Intent and Fit

This study grew out of decades of experience helping companies develop business cases on prospective acquisitions and postmerger integration efforts. We noticed a pattern: When deals exceeded expectations, the acquiring companies had used their own capabilities as a starting point. In their due diligence, instead of just looking for financially attractive opportunities, they asked: “What do we do uniquely well? How does this prospective deal fit?” And they made their decisions accordingly.

Everybody talks about fit when it comes to M&A, but these successful companies seemed to have an unusually clear idea of what fit meant. It did not mean adjacency: bringing in a seemingly related product or service, filling a hole in a grocery shelf category, or entering a new geography. Those types of acquisitions often fail. Rather, fit was related to coherence, the advantage that accrues to a company when its capabilities fit together into a system, aligned to its market position, and applied to its full lineup of products and services.

We decided to test our observation as a hypothesis: In a broad universe of transactions, would we find a correlation between capabilities fit and deal success? We started by identifying the 40 biggest deals by value, in which the buyers were public companies, in each of eight sectors — 320 deals in all — over an eight-year period. To isolate potential M&A success factors, we divided the deals by their stated intent (as defined in corporate announcements and regulatory filings), thus capturing the prevailing view of the purpose of each deal. We used five classifications of intent:

1. Capability access deals. The explicitly stated goal of these deals was to appropriate some capability that the target company had and that the acquirer wanted or needed. Comcast’s 2002 acquisition of AT&T Broadband (so it could offer more comprehensive telecommunications services) and Walt Disney’s 2006 acquisition of Pixar (to extend its animation capabilities and add new films it could market to its established audience) fit into this classification.

2. Product and category adjacency deals. In these deals, a company bought a business with a product, service, or brand related to, but not identical to, its existing business categories. Procter & Gamble’s purchase of Gillette in 2005 and Johnson & Johnson’s acquisition of Pfizer’s over-the-counter drug division (Pfizer Consumer Healthcare) the following year were two well-known deals of this sort.

3. Geographic adjacency deals. The idea behind these deals was to use M&A to expand, but into a new location rather than a new sector or category. Examples include the acquisition of Lucent (U.S.) by Alcatel (France) in 2006, and South African Breweries’ purchases of Miller (U.S.) in 2002 and Bavaria Brewery (Colombia) in 2005.

4. Consolidation deals. These deals were intended to take advantage of synergies and economies of scale, usually between two companies with similar businesses. Oracle’s acquisition of PeopleSoft in 2005 and the Delta–Northwest merger in 2008 were both consolidation deals.

5. Diversification deals. These deals allowed companies to enter a new or unrelated sector, typically with the rationale of insulating results against the business cycle. In recent years, there have been relatively few diversification deals, and they have typically been initiated by holding companies such as Berkshire Hathaway. The private equity sector is now trying to develop the ability to generate value from these types of deals. (See “The Next Winning Move in Private Equity,” by Ken Favaro and J. Neely, s+b, Summer 2011.)

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  1. Gerald Adolph and Justin Pettit, Merge Ahead: Mastering the Five Enduring Trends of Artful M&A (McGraw-Hill, 2009): Describes some of the trends affecting mergers and acquisitions and the concepts and methods of strategically oriented M&A practice.
  2. Bharat N. Anand, David J. Collis, and Sophie Hood, Danaher Corporation, Harvard Business School Case Study No. 708445-PDF-ENG, February 12, 2008: Spells out the portfolio strategy and use of the Danaher business system by this extremely successful M&A “Pac-Man” company.
  3. Paul Leinwand and Cesare Mainardi, The Essential Advantage: How to Win with a Capabilities-Driven Strategy (Harvard Business Review Press, 2011): Broader insight into the value and role of distinctive capabilities and coherence, and guidance for developing a strategy accordingly.
  4. Paul Leinwand and Cesare Mainardi, “The Coherence Premium,” Harvard Business Review, June 2010: Similar analysis of returns for companies that align their capabilities systems with their go-to-market strategy and lineup of products and services.
  5. The Capabilities Premium in M&A by sector:
  6. For more on this topic, see the s+b website at:
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