PART 1: SMALLER M&A deals work out better over time.
Research shows that across most industries, companies with the right capabilities can succeed with a pattern of smaller deals, but in large deals the industry structure plays as much of a role in success as the capabilities of a company and its leadership. As companies get bigger, the ones that get the best returns are those that continue their growth through a strategy of smaller deals, as the big deals can be a bit of hit or miss.
Large Deals: Are more suited to slower growing mature industries as there is great value in reducing excess industry capacity and improving performance, and a lengthy integration effort is less disruptive. Conversely large deals in fast moving and rapidly growing sectors have been less successful, because of the time it takes to integrate the acquisition and companies focus inwardly taking their eye off the ball to some extent on what's happening in the marketplace, maybe missing a new product or upgrade cycle.
Pragmatic Deals: Companies across a variety of industries do well using the programmatic approach. Companies using this strategy completed many acquisitions that together represented a material level of investment. Furthermore the volume effect — the more deals a company did, the higher the probability it would earn excess returns.
PART 2: A strategy that uses CAPABILITIES as the basis for inorganic growth.
— while most other inorganic growth moves have led to a loss of value.
Deals do better when the incoming company matches the acquiring company’s capabilities system. Some industries, such as information technology and retail, show a larger effect; all industries, however, show a consistent, observable capabilities premium in M&A. Deals made with a capabilities perspective are far more likely to generate value over time.
A capabilities system, is something specific: three to six mutually reinforcing, distinctive capabilities that are organised to support and drive the company’s strategy, integrating people, processes, and technologies to produce something of value for customers. they are differentiated and complementary, working together to reliably and consistently deliver a specified outcome, in support of a company’s long-term strategy and market position. These capabilities systems are typically complex and multi functional, and tied closely to the company’s identity; they take a lot of attention and investment to build and maintain. But once in place, they guide a company’s way of creating value in the market and provide distinction and prowess to its products and services.