Why Capabilities Are Critical for Successful M&A

Every year, somewhere between 50 percent and 90 percent of mergers fail. Deals that once seemed full of promise fizzle, falling short of stated goals; and executives are left scratching their heads, wondering what happened.

Take eBay’s purchase of Skype in 2005; eBay was sure the VoIP technology would speed the closing of deals, but ultimately, the capabilities didn’t match, and eBay sold Skype for a loss of more than $1 billion.

Then there are the deals that soar. Google’s purchase of DoubleClick for $3.1 billion in 2008 expanded its online advertising position into display ads and gave it access to DoubleClick’s relationships with Web publishers, advertisers and advertising agencies. Skeptics questioned the high price tag at the time; but today, DoubleClick accounts for a significant amount of Google’s profit and the deal has been heralded as a resounding success.

“So what distinguishes those that fail from the ones that succeed?” Gerald Adolph, senior partner with Strategy&, formerly known as Booz Allen, asked a group of CEOs gathered for a roundtable on M&A success.

The answer: those that are based on a strong capabilities fit, explained Adolph, also the co-author of Merge Ahead: Mastering the Five Enduring Trends of Masterful M&A. While post-merger integration is a key piece of the puzzle, the best integration planning can’t cure a deal that should never have happened. Only those M&A deals that either enhance each company’s distinctive capabilities systems or leverage those systems—or both—have a shot at real success. In this context, a capabilities system is very specific: three to six mutually reinforcing, distinctive capabilities that are organized to support and drive the company’s strategy, integrating people, processes and technologies to produce something of value for customers.

A 2011 Booz Allen study found that even when two companies seemed to have direct overlap, if the capabilities fit was poor, there was almost a nine-point spread in performance in total shareholder value two years after the deal. “The traditional definitions of why we do things, of adjacency and of consolidation are inadequate,” Adolph noted. The most successful deals were those in which an acquiring company took a capability of its own and leveraged it in the newly acquired company. The second most successful ones were those companies that acquired a capability that could then be leveraged to enhance their own capabilities.

These capabilities are like a successful company’s core DNA—a few distinct competencies that work together in a system that makes each company what it is. “If you are, in fact, a successful entity, that set of capabilities probably syncs up with a distinctive way in which you go to market—it’s your strategy, your positioning, your value creation, your metrics. It’s what we call your ‘way to play,’” says Adolph.