Dawgen Global Insights for February 2022

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INTRODUCTION TO OUR MONTHLY NEWSLETTER DAWGEN GLOBAL INSIGHTS Welcome to Dawgen Global and our February 2022 edition of our Monthly Newsletter-Dawgen Global Insights.

This Newsletter has been produced to provide you with an overview of our firm and the wide range of services offered by Dawgen Global entities; whether audit, accounting, tax or advisory services.

Over the past 20 years, I can proudly say that Dawgen has significant experience and expertise that we draw upon, day after day, helping our clients to progress.

Our Monthly Newsletter will demonstrate the strength of our firm and the unique and innovative approach we engender.

This is communicated through client case studies on how our team have collaborated to help our clients succeed.

This issue of Dawgen Global Insights explores several management tools and strategies including Information Technology (IT) Redesign. Disruptive change has put a tremendous strain on organizations and their IT departments. The capabilities of the IT talent are declining due to inadequate technical education and aging workforce. This article talks about the 6 key drivers of value for the IT function that organizations can strive for by overhauling their IT departments.

In this edition we also examine Capabilities-driven M&A. The constant question across all industries, as far as Mergers and Acquisitions (M&A) are concerned, pertains to the factors that differentiate organizations with successful histories.

The analysis of inorganic growth in the merged and acquired organizations revealed that deals made to enhance or leverage the things that companies do well constantly outdid others.

I hope that you will find the information we provide in this Newsletter helpful.

Dr Dawkins Brown Executive Chairman Dawgen Global

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TABLE OF CONTENT 04 Information Technology (IT) Redesign

22 Capabilities driven M&A

INFORMATION

TECHNOLOGY (IT) REDESIGN 4

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MARKET & TECH CHANGES CONSTANTLY PUSH ORGANIZATIONS TO TRANSFORM THEIR IT UNITS THIS ARTICLE DELIBERATES ON HOW TO ACHIEVE THIS CHALLENGE

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This article talks about the 6 key

Article Overview

D

drivers of value for the IT function that organizations can strive for by

isruptive change has put a tremendous strain

overhauling their IT departments:

on organizations and their IT departments. The capabilities of the IT talent are declining due to

inadequate technical education and aging workforce.

Legacy systems and diverse IT applications are frequent across most organizations.

Mergers and acquisitions

have become a norm, pushing vendors to form alliances.

Mobile devices, tablets, and social media have been quite common across employees of almost all organizations.

Cost-

Quality

effectiveness

Cloud Computing and Software-as-a-Service (SaaS) have further complicated IT strategies, facilitation of Information Security, and keeping costs under control.

Leadership of the IT units is under immense pressure to revamp their IT function in order to deliver advanced functionalities, stay abreast of Innovation, curtail costs, and

Responsiveness

Aggregation

Agility

Innovation

provide superior Customer Experiences to deliver a distinct Competitive Advantage in this competitive landscape.

These value drivers help Technology Leadership determine and develop those IT capabilities the organization needs most.

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INFORMATION TECHNOLOGY (IT) INFRASTRUCTURES,

SYSTEMS, SERVICES AND OPERATIONS ARE GETTING COMPLEX DAY BY DAY

IT Redesign

Overview Disruptive

change

has

put

a

tremendous strain on organizations as a whole and specifically on their IT departments.

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DAWGEN GLOBAL INSIGHTS I FEB 2022

T

he capabilities of the IT talent are

Systems to capture real-time data and using

declining due to inadequate science

it to make informed decisions and provide

and technical education and aging

personalized responses to customers (predictive

workforce.

analysis) will become a necessity in future.

Legacy systems and diverse IT applications are frequent across most organizations. Frequent Mergers and Acquisitions are further pushing the organizations to form alliances.

Mobile

Organizations that will not equip themselves with these systems quickly will simply end up outsourcing to companies able to provide such services inexpensively and efficiently.

devices, tablets, and social media have been quite common across employees of almost all organizations. Cloud Computing and Softwareas-a-Service (SAAS) have further complicated IT strategies, facilitation of Information Security, and keeping costs under control.

Leadership of the IT units is under immense pressure to deliver advanced functionalities, stay abreast of the changing technology innovation and trends, curtail mistakes and costs, protect from security threats, and facilitate in providing superior

customer

distinct

Competitive

experiences

to

deliver

Advantage

in

today’s

competitive landscape.

This has resulted in

added complexities and outsourcing of services.

Revisiting the IT function does not work merely by following generic recommendations of pundits from leading IT companies.

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REDESIGNING THE IT FUNCTION TO MAKE IT MORE STRATEGIC IS SOMETHING THAT THE LEADERSHIP OF

EVERY ORGANIZATION SHOULD DELIBERATE, PLAN, AND EXECUTE

IT Redesign

Value Drivers

Research reveals that the IT function can generate value for an organization in 6 ways, using efficient deployment of technology:

IT Redesign warrants taking into account the state of affairs and business of a specific enterprise.

Reforming the IT function should follow a systematic

Cost-

process of clearly directing the unit’s focus on the value

effectiveness

propositions of the company.

Quality

To accomplish this, IT

leadership needs to first analyze their existing service or product offerings and evaluate the value they generate.

A dedicated commitment to the delivery of these 6 value

Responsiveness

Aggregation

Agility

Innovation

drivers enhances the impact of the IT unit tremendously.

Source: Well-Tailored IT, Booz&Co, 2013

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TO OVERHAUL THE IT FUNCTION, IT IS IMPERATIVE TO

CATEGORIZE KEY INITIATIVES AND TASKS DELEGATED ACCORDING TO THEIR PRIORITY

IT Redesign

Agendas

IT

Redesign

typically

commences in order to fulfill any, or a combination, of these 5 agendas:

Capability Builder

Value Player

IT Redesign necessitates prioritizing tasks and responsibilities assigned to the IT function.

To do this, technology leadership needs to answer the following key

Operator

questions.

• Are these tasks associated with creating a distinctive capability?

• Do these tasks just make up competitive necessities?

IT Redesign should be considered keeping in view the strategic role the IT function is going to play in the organization. The role could be:

Technology Leader

• A unit able to steer the departmental agenda and assist in realizing the overall organizational goals.

• To guide the way IT is embraced and operates within the organization.

Another role associated with revamping

Service

the IT function is to support in the

Broker

execution of the Corporate Strategy.

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IT DEPARTMENTS OF ORGANIZATIONS AIM TO ACHIEVE ONE OF THE 5 DISTINCT ROLES THE FUNCTION CAN PLAY IT Redesign

Value Driver & Agenda Alignment The diagram below illustrates the scenarios where archetypical IT agenda are mapped against IT Value Drivers.

Cost-effectiveness Value

Agility Technology Leader

Quality

Player

the IT function Capability

Operator

Builder

Innovation

The agenda of serves to achieve a certain set of value drivers for

Service Broker

Aggregation

the organization.

Source: Well-Tailored IT,

Responsiveness

Booz&Co, 2013

The linkages in the visual demonstrate how different functional agendas (the ovals) add value to the enterprise utilizing the value drivers.

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MANAGING IT RELATED

THIS DRIVER OF VALUE

COSTS IS THE FOREMOST

FOR THE IT FUNCTION

DRIVER OF VALUE FOR

WARRANTS MAINTAINING

THE IT FUNCTION

HIGH STANDARDS OF QUALITY OF SERVICE /

IT Value Driver

Cost-effectiveness TYPICAL COMMITMENTS • Keep IT related costs lower than those of rivals.

• Reliably enhance the cost indicators.

• Finance initiatives to build distinctive capabilities.

• Curtail spending in activities not adding value for the enterprise.

PRODUCTS IT Value Driver

Quality TYPICAL COMMITMENTS • Consistently achieve or exceed the agreed upon—or standard—service levels.

• Conform

to

security,

confidentiality,

and

regulatory standards and risk management

EXAMPLE

protocols and operational guidelines.

• A renowned retail supermarket has in place a sole straightforward yet reliable IT system to track and manage all functions.

The system

monitors all expenditures and allows investing

EXAMPLE • A large global industrial corporation employs

only in initiatives that positively impact its critical

customized

Robotics

and

Supply

Chain

capabilities (e.g. superior customer service).

applications, utilizing outstanding Operational Excellence capabilities of their people.

Maintaining costs well below

Quality is a key driver of value

the industry standards is highly

for any business, regardless of

desirable for a robust IT function.

industry.

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THIS DRIVER OF VALUE

DEVELOPING &

FOR THE IT FUNCTION

MAINTAINING

DEMANDS CONSISTENTLY

RELATIONSHIPS WITH

HIGH LEVELS OF

3RD PARTIES TO ENABLE

ENGAGEMENT ACROSS THE

NEW COMPETENCES IS

DIFFERENT DEPARTMENTS

ANOTHER IMPORTANT WAY

OF THE COMPANY

TO DRIVE VALUE FOR THE

IT Value Driver

IT FUNCTION

Responsiveness

IT Value Driver

TYPICAL COMMITMENTS

Aggregation

•

Provide accurate and efficient service delivery, candid communication, and high-degree of engagement

•

•

with internal stakeholders.

TYPICAL COMMITMENTS

Collaborate and partner with all other units of the

• Set up and maintain valuable relationships and

organization to prepare realistic estimates and

agreements with technological vendors and

interpret changing internal demand patterns.

3rd party suppliers / contractors.

Stay

informed

of

the

organizational-level

requirements, objectives, and priorities.

EXAMPLE •

In order for financial institutions to thrive in this

• Efficiently

utilize

these

relationships

and

associations to build distinctive capabilities and to fulfill business needs.

age, it is imperative to transform their Strategy and

EXAMPLE

operations in order to serve their consumers better.

• Large multinational automakers have world-class

This can only be accomplished by enabling rigorous

IT units that are fully capable of providing expert IT

cooperation and harmony between the business and

services, essential for consistent Innovation and

IT departments.

developing unique Manufacturing capabilities at plants in several geographies around the world.

Developing a culture of empathy and coordination between the departments ensures that the back office operations fully facilitate front office functions.

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Innovation without an exceptional IT unit is out of question.

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THIS VALUE DRIVER OF

THE LAST KEY DRIVER

IT FUNCTION ENTAILS

OF INNOVATION IN IT

DEVELOPING PROMPT

FUNCTION PERTAINS TO

NEW PRODUCTS AND

DEVELOPING INNOVATIVE

SERVICES DELIVERY

PRODUCTS AND SERVICE

EXPERTISE

OFFERINGS

IT Value Driver

IT Value Driver

Agility

Innovation

TYPICAL COMMITMENTS

COMMITMENTS REQUIRED

• Build the capability to offer new product or

• Create new service and product offerings that

service offerings promptly.

• Possess the competence to scale up or down, implement new projects, and assimilate newly acquired entities, etc.

are aligned to the core organizational values and objectives.

• Embrace disruptive technologies to outpace rivals and become a market leader.

EXAMPLE

EXAMPLE

• A consumer products manufacturer incessantly

• High-end retail stores that offer a blend of

searches for methods to streamline its Supply Chain, offer superior Customer Experience, and better manage its social media. Such an IT department is always supportive of providing the workforce with new tools and systems.

exceptional online and on-site retail stores usually have sales teams equipped with mobile checkout devices. These stores have repeat customers who frequent their shops to find out more about the innovative mobile and online features launched and explore their innovative products.

This value driver aims at building the capacity of organizations to

Quality is a key driver of value

learn new knowledge in a short

for any business, regardless of

time.

industry.

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HERE WE HAVE LISTED THE SALIENT ASPECTS OF 5 DISTINCT AGENDAS THAT IT FUNCTIONS PURSUE IT Agendas – Overview (1 of 2)

KEY FEATURES Value Player

Tech-nology Leader

• A profound focus on cost and efficiency.

• Focus on gaining the first-mover advantage

• Proficiency

in

consistency

and

basic

functionality • Ability to execute each service across the board to boost the return on investment whilst restricting the product variations and

by providing revolutionary products and services.

• Leverage

advanced

technological

capabilities.

• Favored by organizations aiming to surpass the capabilities gap quickly and efficiently

service portfolio.

and become a truly-distinguished business.

Operator • A focus on quality service, implementation, and operational excellence while minimizing risks.

• Favored

by

organizations

that

utilize

technology with the goal of preventing misfortunes/

losses

keeping

up

high

volumes, or achieving consistency.

• Cautious when investing in costly advanced technologies (not to incur too much costs).

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The IT function should assume an appropriate role based on the organizational objectives, values, and Business Strategy.

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THE IT DEPARTMENT ASSUMING A SERVICE BROKER ROLE COLLABORATES WITH INTERNAL UNITS AND EXTERNAL GROUPS TO DEVELOP DISTINGUISHED CAPABILITIES IT Agendas – Overview (2 of 2)

KEY FEATURES Service Broker

Cap-ability Builder

• A focus on scaling up and enhancing

• Rigorous participation in innovating new

delivery of consistent high-quality products

practices and processes to create a robust

and services.

Corporate Strategy.

• Favored usually by global companies with several outsourcing service providers.

• This type of IT unit incorporates services from outsourced providers and vendors

• This agenda is way more than a functional shared-services role.

• This IT unit is essentially a strategic partner to senior leadership team and the CEO.

into a complete customer-facing solution.

The “Capability Builder” agenda assists the senior management in figuring out and selecting key distinctive capabilities to invest in.

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THE AGENDA OF YOUR IT FUNCTION SHOULD BE CAREFULLY ALIGNED WITH YOUR CAPABILITIES SYSTEM IT Agendas – Details The 5 agendas of the IT unit are all workable depending upon the organizational objectives and Corporate Strategy. The service provider role is, however, typically outsourced to an external provider.

An IT department cannot deliver everything asked for by the business—the department heads should prioritize and ensure provision of features most critical for the business.

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As an example, the IT units’ agendas for a premium

modernization, while offering prices low enough to

long-haul airline versus a budget airline would be

lure premium customers in believing that they are

quite opposing. The premium airline aiming to

receiving bargains.

provide superior customer experiences invests heavily in latest technologies—the technology leader IT agenda. It would develop highly customized technological platforms comprising a customer relationship management (CRM) system to connect customers to the airline permanently using tailored offers; rapidly test new cabin designs, innovate its supply chains; and have a dynamic online presence. These platforms and systems help the airline differentiate itself in quality service and

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The IT agenda of an airline providing reasonable services at a tight budget is typically to be a Value Player: outsource back-office activities; strictly manage demand; provide low-cost personal computers to customer service and ticketing teams; and control low costs using a self-service website.

The IT unit’s agenda should transform in line with the changes made in the Business Strategy by the senior leadership, due to external market forces.

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Capabilities

driven M&A 22

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THIS ARTICLE DISCUSSES CAPABILITIES-DRIVEN M&A THAT

UTILIZES CAPABILITIES SYSTEMS AS THE SOURCE OF IMPROVED GROWTH AND PROFITABILITY

Article Overview The constant question across all industries, as far as Mergers and Acquisitions (M&A) are concerned, pertains to the factors that differentiate organizations with successful histories.

A 2011 study scrutinized 320 deals over a time span of 9 years starting from year 2001 to the year 2009, spread across 8 industry sectors.

Companies employing the Capabilities-driven Strategy had phenomenal inorganic growth. The study crosscategorized the deals by their Capabilities System Fit, into the following 3 categories:

1

Enhancement Deals

2

Leverage Deals

3

Limited Fit Deals

Research reveals that deals

The analysis of inorganic growth in the merged and

related to a Capabilitiesdriven Strategy have shown increased

acquired organizations revealed that deals made to

Shareholder Value even in

enhance or leverage the things that companies do well

economic crisis.

constantly outdid others.

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‘CAPABILITIES’ IS THE DRIVING FORCE BEHIND M&AS THAT OUTPERFORM OTHERS IN THEIR INDUSTRY Capabilities Premium in M&A Overview Mergers and Acquisitions (M&A) generally do not produce the outstanding results that they are envisioned and purported to provide.

Inorganic growth efforts that were not based on Capabilities have shown loss in value.

Some companies in certain industries, however, demonstrate consistent success when it comes to M&A. The magic ingredient in the success of these companies is a Corporate Strategy that utilizes Capabilities as the source for inorganic growth. Experienced acquirers craft M&A deals that do 1 of 3 things: Enhance their distinguishing Capabilities Systems.

Deals drive improved results when the incoming company pairs with the acquiring company’s Capabilities Systems.

Leverage Capabilities Systems.

Both enhance and leverage the Capabilities Systems.

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CAPABILITIES-DRIVEN M&AS OUTPERFORMED OTHERS BY 12% IN TERMS OF COMPOUND ANNUAL GROWTH RATE Capabilities Premium in M&A Returns Deals associated with a Capabilities-driven Strategy managed to raise shareholder value for the acquirer despite the tough years since the economic crisis of the 2000s.

The majority of other inorganic growth attempts produced a loss of value.

Companies employing the Capabilitiesdriven Strategy were recompensed

Return to shareholders

Compared with Market Index)

with deals that had a Compound

Enhancement

Annual Growth Rate (CAGR) average

Leverage

of 12 percentage points greater in

Limited Fit

0.4% 3.9% -9.1%

shareholder return compared to M&A deals by other acquirers in that very industry and region.

For deals made between 2001 and 2009, during the two years after the closing, those that enhanced or leveraged capabilities gained value in

Returns from enhancement and leverage deals, compared with Limited Fit deals Enhancement

25%

Leverage 20%

total shareholder returns compared with the market index. By contrast,

15%

deals with a limited capabilities fit lost value (as shown at left). Overall,

10%

Limited Fit deals averaged returns of 12 percentage points CAGR less than the

5%

others. The right sides shows relative

long-run is shown by deals made with a Capabilities perspective.

DAWGEN GLOBAL INSIGHTS I FEB 2022

Retail

IT

Chemicals

Healthcare

Media

Consumer Staples

Value created in the

Electric utilities

and leverage deals.

0% Industrials

gains by industry for enhancement

Particular industries, for instance Information Technology and Retail, demonstrated a bigger effect, however, all industries display a steady, noticeable, Capabilities Premium in M&A 25

CAPABILITIES PREMIUM IN M&A

CAPABILITIES SYSTEM

Capabilities Systems are defined as 3 to 6 reciprocally strengthening, distinguished Capabilities that are structured to hold up and drive Organizational Strategy, integrating people, processes, and technologies to create something of value for customers.

CAPABILITIES SYSTEMS ARE Discerned and harmonizing, operating collectively to dependably produce a stipulated result, in favor of a company’s long-term strategy and market position.

Characteristically multifaceted, multifunctional, and entwined intimately to the company’s identity.

Attention and investment intensive—take quite a bit of both to build and maintain.

Walt Disney is an

A guide to company’s manner of generating value in

for demonstrating

the market and impart individuality and ability to its

Capabilities

products and services.

CAPABILITIES SYSTEMS DO NOT COMPRISE OF

effective example

System; it utilizes its Capabilities in a diverse arena.

Capabilities that are required by the business to keep afloat, for example, no-frills legal, tax, operations, and facilities management.

Competitive essentials that relate to certain industries, even though some similarity may occur.

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CAPABILITIES-DRIVEN STRATEGY PROVIDES

THE ACQUIRER A CLEAR VISION REGARDING PROS & CONS OF A PROSPECT

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Capabilitiesdriven M&A

Overview

SOME CHARACTERISTICS OF SUCCESSFUL CAPABILITIESDRIVEN M&A INCLUDE: Clear perception of the acquirer regarding who they are and what they do well; this clarity provides a vantage

Capabilities-driven Strategy is exceptionally beneficial in M&A transactions where, frequently, time window is narrow and the risks elevated.

while investing capital.

Keeping away from attempting to win in domains where there is no builtin Capabilities advantage; this may mean skipping a chance for prompt profit but it also confines the extent of damage.

Having a dependable and quick guide to comprehensive judgment by way

Amazon’s Capabilities Systems in its various businesses fit well together.

of understanding one’s Capabilities Systems.

Spotting a prospect that is ostensibly appealing but does not fit; and evading it in time.

Having a strong foundation for appraising the correct price when a deal fits.

Being in a superior situation to gain value in the course of execution of the merger.

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DIVVYING SUCCESSFUL DEALS

BY THEIR ANNOUNCED INTENT MAKES IT EASY TO

DETECT M&A SUCCESS FACTORS

Capabilities-driven M&A

Classification of Intent Setting apart likely M&A success factors is accomplished more easily by separating successful deals by their declared Intent consequently, capturing the dominant view regarding purpose of each deal.

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The intent of M&A deals is clearly pronounced

Following 5 classifications can be used for Intent:

in corporate

CAPABILITY ACCESS DEALS

announcements and

Clearly specified objective of these deals is to take

regulatory filings.

over a Capability that the target company possesses and that the acquirer desires or wants.

Source: The Capabilities Premium in M&A, Booz & Company, 2012

PRODUCT AND CATEGORY ADJACENCY DEALS Such deals consist of acquiring companies purchasing a business with a product, service, or brand matching, but not same as, its current business categories.

GEOGRAPHIC ADJACENCY DEALS Thought behind such deals is to utilize M&A to spread out, not into a different sector or category rather, in a new locale.

CONSOLIDATION DEALS These deals are envisioned to capture the benefit of synergies and economies of scale, typically among 2 companies with comparable businesses.

DIVERSIFICATION DEALS Deals of this nature allow companies to go in a new or dissimilar sector, characteristically with the purpose of isolating results against the business cycle.

DAWGEN GLOBAL INSIGHTS I FEB 2022

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M&A DEALS CAN BE CATEGORIZED INTO

3 TYPES BASED ON THEIR CAPABILITIES FIT Capabilities-driven M&A

Classification of Capabilities There is a lot of talk about Fit during M&A discussions. Fit does not mean introducing an ostensibly linked product or service, plugging a gap in a category, or moving in a new geography—such sorts of acquisitions are frequently unsuccessful.

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Fit relates to unity, the benefit that ensues when Capabilities of a company fit mutually into a system, lining up to its market position, and employed to its complete array of products and services.

DEALS WHEN CROSS-CATEGORIZED BY THEIR CAPABILITIES SYSTEM FIT FALL INTO FOLLOWING 3 CATEGORIES:

ENHANCEMENT DEALS Deals where acquirer introduces fresh Capabilities to plug a gap in its current Capabilities System or react to a variation in its market.

LEVERAGE DEALS Deals in which the acquirer leverages existing Capabilities System by employing it to incoming products and services usually enhancing the purchased business’s performance.

LIMITED FIT DEALS

M&A deals typically take place to realize 1 of these Capabilities System Fit. Source: The Capabilities Premium in M&A, Booz & Company, 2012

Deals where the acquirer mostly disregards Capabilities; usually fetching the purchaser a product or service that requires Capabilities it does not have.

DAWGEN GLOBAL INSIGHTS I FEB 2022

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CAPABILITIES-DRIVEN STRATEGY REQUIRES ASKING

MUCH MORE THAN FINANCIAL QUESTIONS WHEN EVALUATING A M&A DEAL Capabilities-driven M&A

Key Questions

Stakeholders have a tendency to pay more attention to financial questions when assessing a deal.

Financial questions, even though crucial, are inclined to take attention away from strategic issues and more towards transactional matters.

Capabilities-oriented deal evaluation, on the other hand, includes everybody in contemplating more about the long-term value of deals. Such evaluation is effective when done throughout the M&A process.

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DAWGEN GLOBAL INSIGHTS I FEB 2022

The questions to ask in a Capabilities-oriented M&A deal evaluation include: • What exclusivity does the target company’s

• In case of an Enhancement deal—acquiring

Capabilities System have that enables the

the company for its Capabilities—will that

company to create value for customers?

Capabilities System be maintained and integrated into the acquiring company’s system?

• What is the difference between the Capabilities Systems of acquiring company and the acquired company?

• How will the unfolding Capabilities System of the unifying entity be arrayed and implemented and what are the hazards of disjointedness?

• If it is a Leverage deal—i.e., company is being bought for its products and services portfolio—

• In order to deploy a joint Capabilities System,

will it flourish in the acquiring company’s

onboarding of which facilities, processes,

Capabilities System?

suppliers, and employees is vital?

Fundamental questions that were asked in successful M&As included: What do we do well that others do not? In what way does this likely deal fit?”

DAWGEN GLOBAL INSIGHTS I FEB 2022

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A COMPREHENSIVE STUDY THAT SPANNED 9 YEARS AND

8 INDUSTRY SECTORS WAS CONDUCTED IN 2011 FOR EXTRACTING THE LIKELY M&A SUCCESS FACTOR Study of Capabilities-driven M&A

Overview

What factor (or factors) enables certain companies to draw out the full benefits of Mergers and Acquisitions, is an interesting study to perform. Such a study was performed in 2011.

This study matured based on a number of years of experience assisting companies cultivate business cases on potential acquisitions and Post-Merger Integration endeavors.

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The following are the salient features of the study: • Scrutiny of 320 deals over a time span of 9 years starting from year 2001 to the year 2009 was performed.

• These deals were spread across 8 industry sectors: Industrials, Electric utilities, Consumer staples, Media, Healthcare, Chemicals, Information technology, and Retail.

• Performance Measurement of these 320 deals comprised of comparing the acquiring company’s Total Shareholder Return (TSR), Compound Annual Growth Rate (CAGR)—2 years after conclusion of acquisition—with the TSR CAGR of the large-cap index in the acquiring company’s country.

• A component of the research dealt with assessing intention of the deals and classifying them.

• For intent assessment corporate announcements, external press coverage, and SEC filings were examined.

• Researcher’s own judgement, analysis, and experience with clients were relied on to decide if the deals were Enhancement, Leverage, or Limited Fit deals.

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ENHANCEMENT DEALS USE ACQUIRED CAPABILITIES TO

FILL CHINKS IN THE EXISTING CAPABILITIES SYSTEM ARMOR

Study of Capabilities-driven M&A Enhancement Deals Enhancement Deals

Number of Deals

Enhancement deals enable the acquiring company to include new

Enhancement

57

Capability Access

12

Product & Category Adjacency

32

Geographic Adjacency

3

Consolidation

3

Diversification

None

Return Compared with Market Index 0.4% (avg.)

Capabilities so as to close gaps in its present Capabilities System or counter an alteration in its market.

Nearly 2/3rd of the deals studied—in the 2011 study spanning 8 sectors— used Capabilities to good effect, either by way of Enhancement or Leverage.

Such deals cause Transformation in the core Capabilities System therefore, data analysis indicated that they contributed less value than Leverage deals, in the short run at least.

Hypothesis in the study tried to find a correlation amid Capabilities Fit and deal success?

Source: The Capabilities Premium in M&A, Booz & Company, 2012

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FOLLOWING COMPANIES HAVE SUCCESSFULLY MADE USE OF ACQUIRED CAPABILITIES TO ENHANCE THEIR CAPABILITIES SYSTEMS

Study of Capabilities-driven M&A Enhancement Deals (Examples)

Enhancement deals are able to furnish a mechanism to intensify a Capability that a company already possesses.

EXAMPLES Reckitt Benckiser

Google acquired

Novartis acquired

DoubleClick, 2008

Alcon, 2008

acquired Boots

$ 3.3 billion

$ 7.7 billion

$ 11.8 billion

This deal gave Google access to

Pixar’s innovations in digital

Many cigarette companies,

a leading display ad platform,

animation expanded Disney’s

including Altria (parent company

improving the effectiveness,

longtime core capability

to Marlboro), had attempted to

measurability, and performance

in motion pictures; Pixar’s

enter the smokeless tobacco

of its digital media services

successful features and themes

category; buying UST gave Altria

for publishers, advertisers,

(starting with Toy Story)

the production capabilities, as

and agencies, and making

reinforced Disney’s capability in

well as access to specific forms

advertising more relevant for

marketing to a target audience

of tobacco leaf, that made the

audiences.

through adjacent businesses

adjacency move viable.

(including theme park exhibits

Healthcare, 2006

and merchandises).

These deals may necessitate investment, include certain market risk, or most likely have longer maturity period.

In the 8 sectors studied, each sector had 40 deals that were made part of the study.

Source: The Capabilities Premium in M&A, Booz & Company, 2012 DAWGEN GLOBAL INSIGHTS I FEB 2022

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CONVERSE APPROACH TO SUCCESSFUL M&A IS TO USE A COMPANY’S EXISTING CAPABILITIES SYSTEM ON

PRODUCTS OR SERVICE OF THE ACQUIRED COMPANY

Study of Capabilities-driven M&A – Leverage Deals Leverage Deals

Diversification

Leverage deals are where the acquirer

Leverage

146

Capability Access

None

Product & Category Adjacency

69

Geographic Adjacency

31

Consolidation

44

Diversification

2

None 3.9% (avg.)

makes use of prevailing Capabilities System in their company to handle incoming products and services, customarily augmenting the acquired company’s performance.

Study of the 320 deals revealed that, for the most part, the largest premiums could be attributed to the Leverage classification.

In these deals, purchasers employ their hitherto successful Capabilities Systems to products, and services of purchased businesses, causing performance increases and profitability.

Purchasing companies applied their own Capabilities as an initiating point in deals that surpassed expectations.

Source: The Capabilities Premium in M&A, Booz & Company, 2012 40

DAWGEN GLOBAL INSIGHTS I FEB 2022

FOLLOWING COMPANIES HAVE SUCCESSFULLY MADE USE OF ACQUIRED CAPABILITIES TO ENHANCE THEIR CAPABILITIES SYSTEMS Study of Capabilities-driven M&A Enhancement Deals (Examples) Enhancement deals are able to furnish a mechanism to intensify a Capability that a company already possesses.

EXAMPLES Reckitt Benckiser

Danaher acquired

Novartis acquired

Tektronix, 2007

Alcon, 2008

acquired Boots

$ 3.3 billion

$ 10.6 billion

$ 3.4 billion

This innovative maker of

Novartis applied its capabilities

Reckitt leveraged its

measuring equipment fit well

in science-driven innovation

capabilities system for building

with Danaher’s electronic test

to further develop the world’s

global brands (R&D, brand

business, and was a natural

leading contact lens and

development, and distribution)

candidate for improvement with

eye medicine business with

by adding three major products

the Danaher business system.

products complementary to the

to its portfolio: Nurofen,

Novartis portfolio.

Strepsils, and Clearasil.

Healthcare, 2006

Even though a smattering of Limited Fit deals show noteworthy returns, particularly consolidation plays, but on the whole their performance is significantly lower than deals that take Capabilities into greater consideration.

Capabilities Fit determines companies’ choice on what to add via M&A.

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CAPABILITIES COME AS AN AFTER-THOUGHT IN LIMITED

FIT DEALS REQUIRING LEARNING OR ATTAINMENT OF NEW CAPABILITIES Study of Capabilities-driven M&A Limited Fit Deals Limited Fit Deals

Limited Fit

117

-9.1% (avg.)

Limited Fit deals are deals where the purchasing company generally ignores Capabilities; normally such deals provide

Capability Access

1

Product & Category Adjacency

50

Geographic Adjacency

33

Consolidation

28

Diversification

5

a purchaser with product or service that need new Capabilities.

Study of Capabilities-driven strategy showed that 37% of the deals were effected with Capabilities as a postscript.

Characteristic of such deals include execution risks, integration challenges, cultural differences, and the departure of key executives.

-30

-20

-10

0

Even outstanding post-merger integration practices are unable to save deals that ignore Capabilities.

Source: The Capabilities Premium in M&A, Booz & Company, 2012

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DAWGEN GLOBAL INSIGHTS I FEB 2022

DEALS ILLUSTRATED HERE SHOW HIGH ADJACENCY BUT THE LIMITED CAPABILITIES FIT MADE THEM LOSS-MAKING DEALS Study of Capabilities-driven M&A Limited Fit Deals (Examples) On the face of it, Limited Fit deals may appear like diversification deals but in reality, they have other characteristics.

EXAMPLES eBay acquired

Kmart Holding merged

Sara Lee acquired

with Sears, 2005

Earth Grains, 2001

Skype Technologies,

$ 19.2 billion

$ 2.7 billion

$ 3.9 billion

Although the rationale

Sara Lee’s move into an

The initial concept was to

suggested that the strengths

adjacent business (fresh bread)

integrate Skype, using VoIP to

of the two enterprises would

had little coherence with the

help speed the closing of deals.

combine to generate better

capabilities needed for its

But the capabilities didn’t

performance, the format

meats, beverages, personal

match, and eBay sold Skype in

differences were significant

care, and even baked goods

2009 at a loss of more than a $

and the chains have remained

(which are largely frozen),

1 billion.

separate, leveraging few if any

because of different routes to

common capabilities, while

market and other execution

financial performance in both

requirements. In 2011, Sara Lee

chains has consistently declined

sold its fresh bread business.

2005

since the merger.

Even though a smattering of Limited Fit deals show noteworthy returns, particularly consolidation plays, but on the whole their performance is significantly lower than deals that take Capabilities into greater consideration.

Deals that overlook Capabilities typically fail—occasionally in a dramatic fashion.

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