Acquisitions create most value when they have a capabilities fit

28/04/22

PwC-report ‘Creating value through industry convergence’

When companies make an acquisition to acquire skills that they themselves lack or have insufficiently, a good match in terms of people, company culture, available technology or processes proves essential. ‘Finding a party with the right match is crucial in order to generate value and create sustained outcomes,' says PwC’s deals expert Gert-Jan van der Marel, in response to the publication of the report Creating value through industry convergence.

Convergence here means the movement whereby, under the influence of digitization, new business models emerge and whereby the traditional dividing lines between sectors fade away. Think of FinTech or HealthTech companies.

Measuring convergence through mergers and acquisitions

The study relies on figures on the increasing number of companies acquiring a party that is not specific to its industry. According to Gert-Jan van der Marel, this increase is an important indicator for further disruption of industries. 'For established companies, a non-sector-specific transaction is the fastest way to respond to changes in the market. Organically building new specific capabilities, business models or customer bases typically takes more time.'

Long-term value creation

Through strategic reorientation, digital transformation and more attention to human potential, companies are increasingly focusing on long-term value creation, according to Gert-Jan van der Marel. 'Mergers and acquisitions are an important tool to accelerate value creation, provided organizations start thinking about value in a more holistic way. A more holistic view also focuses on the potential of acquisitions of non-sector-specific parties.'

Good match is crucial

However, the report Creating Value through industry convergence warns that even in the case of convergence and the creation of new value propositions, companies must pay close attention to the match between capabilities and the acquiring party. 'This sounds almost contradictory because in the convergence context, companies are actually looking for acquisition partners who can do something they cannot. But there are limits to this', says Van der Marel: 'We have seen that transactions are more successful if there is a good capabilities match. An acquisition of a start-up by a large company, for example, often runs aground because of major differences in corporate culture. And then you don't create value, you destroy it.’

Keep an eye on the market

Keep an eye on the market, advises Van der Marel. ‘What new business models are being developed? Know what is going on in your own and adjacent markets. Which newcomers are entering the market? Analyze which capabilities you have, which you lack and how you would like to build those for further value creation. Can it be done organically? Is a transaction a better solution? When looking for an acquisition partner, focus not only on the numbers, but also on the capabilities fit. That way you enormously increase the chance of creating value.’

Disruption and convergence in all industries

This is not the first time that new entrants have caused a disruption in traditional patterns, as we also noted in our first survey of converging industries in 2018. Since the beginning of the century, the first two phases of disruption were largely driven by a few industries. This led to a limited impact at the macroeconomic level. The current wave is affecting all industries, resulting in a much larger impact.