The 31 transactions (worth 72 percent of its market capitalization) that Danaher has conducted between 1995 and 2011 are almost all leverage deals, in which the company applies its capabilities system to a new or adjacent product or service area. Danaher’s M&A program has helped raise the company’s share price by a factor of 15 over that time period, a performance far superior to that of the S&P 500 and many of Danaher’s competitors.
• Li & Fung Ltd. Based in Hong Kong, this sourcing company designs and transports products for manufacturers, including many apparel and durable goods makers in the United States. Li & Fung’s capabilities system — which includes the management of a network of suppliers, seasoned skills for negotiating both price and quality of delivered goods, and a highly refined distribution network in North America and Europe — has made it the world’s largest supplier of toys and clothes to retailers. The company showed a 25-fold rise in total shareholder return between 1995 and 2010. (This was offset somewhat by a 45 percent drop in 2011, which led to a management shake-up; however, most observers agree that the cause was the global recession and flagging consumer sentiment, and prospects for the company remain strong.)
Although sourcing might not seem like a fertile sector for acquisition, Li & Fung has spent about $5 billion, more than one-fifth of its current market capitalization, to buy 24 smaller competitors. All of its deals broaden and deepen its sourcing network, already one of the most extensive in the world. These acquisitions bring Li & Fung additional revenue and new manufacturing customers, and sometimes allow it to add expertise in a new product area. In 2010 and 2011, for instance, Li & Fung bought leading suppliers of leather goods, health and beauty products, denim products, and toys, along with onshore sourcing companies in the U.S. and western Europe. In an interview in June 2011 with Bloomberg News, company chairman William Fung said rising wages in China may also prompt the company to look for deals in other developing markets, such as Vietnam, Bangladesh, and India. In all these acquisitions, the capabilities-oriented logic remains constant.
• Walgreen Company. The largest drug retail chain in the U.S. has more than 7,700 stores in the United States, many of which it opened organically. But it also has a track record of acquiring companies that contribute to share performance, and the company is noteworthy for making both leverage and enhancement deals. In its leverage deals, Walgreens typically buys regional drugstore chains, such as Happy Harry’s (founded in Delaware) and ApothecaryRx (which has 18 pharmacies in five Midwestern states). It rapidly converts all incoming retail properties to the Walgreens format (its counterpart to the Danaher business system), minimizing store downtime during integration. In addition, by bringing rigorous pharmacy management capabilities to its acquired stores, Walgreens drives up its productivity (as measured by prescriptions sold and same-store sales) and reduces operating costs.
The enhancement benefit that Walgreens can gain from acquisition was evident in its 2010 purchase of Duane Reade Inc., a signature New York City chain with some unique capabilities, including local marketing and the merchandising of fresh food and beauty products. Similarly, the recent acquisition of the online-only retailer Drugstore.com will enable Walgreens to learn from a more experienced e-commerce player and to forge a multichannel strategy in a competitive sector where consumers increasingly want to shop online.
It takes a great deal of skill to be a successful serial acquirer; most companies fail at M&A more often than they succeed. When they look back at their unsuccessful deals, executives tend to blame timing or some financing blunder: “We paid too much; we took on too much debt.” To be sure, those factors make a difference. But behind every truly bad deal there is typically some fundamental mistake in capabilities assessment, or poor execution in integrating capabilities. Danaher, Li & Fung, and Walgreens avoid those errors because they understand their capabilities systems and design their deals accordingly, time and time again.