Companies Use Deals to Buy New Skills in Battle to Spur Growth
24 January 2019 - 4:30AM
Dow Jones News
By Tatyana Shumsky
Companies increasingly are looking outside their comfort zone
for acquisition targets as they seek to propel growth and stave off
digital disruption, according to a report by Bain & Co.
Companies struck strategic deals worth $3.4 trillion globally in
2018, the consulting firm said. Of those, 51% were classed as
"scope deals" that gave the company something new, such as new
capabilities or access to new markets.
It was the first time in at least four years that such deals
outpaced what Bain refers to as "scale deals," which merely boost
the buyer's share of an existing market. The report analyzed the
largest 250 deals each year since the start of 2015.
Companies are seeking to add capabilities as they contend with
disruption to their business models, particularly from new
technologies. They also are finding it harder to maintain or
increase their pace of growth. The median annual revenue growth
rate for some of the world's largest public companies has declined
to 5.9% in 2018 from 9.7% in 2005, according to Bain, which
analyzed companies in the S&P 500 and four other international
stock indexes.
"Rather than trying to build that [new capabilities] internally,
which has a mixed record of success, they are instead looking to
buy it from outside," said Peter Horsley, a partner at Bain and one
of the report's authors. "In many cases it can be quicker and it
can guarantee that you've got access to the best-in-class
capabilities."
Amazon.com Inc.'s purchase of online pharmacy PillPack Inc. and
Coca-Cola Co.'s acquisition of British coffee-shop chain Costa are
among the high profile scope deals struck in 2018, according to the
Bain report.
Companies have long turned to mergers and acquisitions to stave
off slowing revenue growth. But transactions that only aim to boost
market share and cut operating costs do little to protect a
business from disruption, Mr. Horsley said.
Companies looking to fireproof operations are turning to deals
that add product lines, geographies or capabilities. Deals focused
on adding a capability accounted for 15% of all strategic deals
valued at more than $1 billion in 2018, up from 2% in 2015, the
report said.
Executives rank competition with companies that were "born
digital" and the rapid speed of disruptive innovations among the
top risks for 2019, according to research conducted by North
Carolina State University's Enterprise Risk Management Initiative
and management consulting firm Protiviti Inc.
Scope deals require a different approach to everything from due
diligence to integration when compared with scale deals. Executives
assessing an acquisition that will add a new capability must focus
on how the combined company will jointly create value over time,
rather than seeking potential cost savings from operational scale,
Mr. Horsley said.
The risks of such transactions can hinge on talent retention. A
buyer must assess the compatibility of the target company's culture
and whether employees are likely to stay.
Managers also must decide whether to bring the newcomer into the
fold or keep the target as a separate company. "There are real
dangers to over-integrating: You stifle its people, you slow its
decision-making velocity and you lose the value of the company you
acquire," Mr. Horsley said.
"You can buy a company that's very different to yourself and
keep it separate, but then you face a hard question about what is
the parenting advantage, what do you bring to that combination," he
said.
Unfamiliarity is another reason why scope deals can fail.
Executives from one industry can find it challenging to assess how
much value they are likely to realize by purchasing a business from
another sector, Mr. Horsley said.
Take Yahoo Inc.'s $1.1 billion acquisition of blogging site
Tumblr in 2013, which was growing rapidly but unprofitable. In
2015, Yahoo's decision to integrate Tumblr's advertising sales team
sparked a talent exodus from Tumblr, Mr. Horsley said, adding that
Yahoo ultimately wrote off roughly $700 million in connection with
the deal.
A spokesman from Verizon Communications Inc., which purchased
Yahoo in 2017, declined to comment.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com
(END) Dow Jones Newswires
January 23, 2019 12:15 ET (17:15 GMT)
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