Operational capability driven organizations contribute a significant greater return on shareholder equity than any other growth strategy

This was confirmed in a recent research initiative undertaken by PwC (PricewaterhouseCoopers) on 540 enterprises – reference the article below.

After analyzing 540 deals in nine industries that were announced between 2001 and 2012, we found that the premium for capabilities-driven deals, in fact, adds an average of 14 percentage points to two-year shareholder returns compared with those of public company deals based on other rationales.

The challenge faced by all organizations however, is determining which operational performance capabilities to focus on, and how to qualify/quantify them without excessive time and cost involvement.

Our research focused on long term successful enterprises to understand which amongst the multitude of capabilities within all organizations, independent of their industry or size were the most essential ones.

Collaboration with several major successful enterprises during the research and the subsequent application of this methodology with hundreds of organizations of varying sizes from multiple industries validated the essential capabilities determined by the research.

The Capable Deal Maker

An article in Strategy & Business by PwC (PricewaterhouseCoopers)
August 2015

For many years, managers of public companies have looked to the deal-making titans of the private equity (PE) sector for lessons in how to improve their success rates in making mergers and acquisitions. But today, nearly 6,000 PE firms with more than US$1.2 trillion of “dry powder” to invest (a 200 percent increase over the last 10 years) are scouring the landscape for deals. This competition, which is pushing up prices, could make it more difficult for PE players to realize attractive returns — especially if the long-running bull market slows down.
We believe that in this hypercompetitive market, PE firms can take a page from the playbook of public companies that have enjoyed standout success in M&A. We have found that the most successful corporate acquirers — companies such as Abbott Laboratories, Danaher, and Disney — have mastered what we call a capabilities-driven approach to inorganic growth. That is to say, they understand the differentiated capabilities system of their businesses, the key strengths that combine processes, tools, knowledge, skills, and organization in a way competitors can’t match. This understanding gives their deals both higher success rates and market-beating financial returns. After analyzing 540 deals in nine industries that were announced between 2001 and 2012, we found that the premium for capabilities-driven deals, in fact, adds an average of 14 percentage points to two-year shareholder returns compared with those of public company deals based on other rationales.

This capabilities approach can work just as effectively for PE firms, both before and after deals are completed. They can use this set of principles while searching for and screening acquisition targets, and in driving performance at portfolio companies after the deals are done.

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