Transactions in the healthcare, telecommunications and automotive sectors are the most profitable

The pandemic has led to a boom of M&A activity, as companies transform their business models to position themselves in a post-COVID scenario. Nevertheless, not all transactions create the same value or generate the same returns. The M&A operations carried out by the healthcare (including pharmaceutical), telecommunications and automotive sectors are the most profitable and those that create the most value for shareholders. This follows from the report Doing the right deals, prepared by PwC, based on the analysis of 800 operations from 16 different industries, carried out in the last ten years.

The secret of this success has to do with the fact that 90% of the operations carried out in the aforementioned sectors are aimed at acquire new capabilities or enhance existing ones -defined these as the combination of processes, tools, technologies and skills that makes a company provide a unique value to its customers-.

Conversely, transactions that are not directly focused on acquiring or upgrading capabilities do not have the desired return. These range from those destined to enter a product category, in a new geographic market or the operations that are carried out to consolidate or diversify a company (see graph).

The document ensures that the deals that aim to acquire new capacities (or improve existing ones) are the ones that achieve a greater return for the shareholderaround 14% more-, compared to the transactions that they do not consider these aspects. To carry out this analysis, the report divides the transactions into three large groups:

To take advantage of the buyer’s current capabilities

We would be talking about the classic operation in which one company takes over another in which the buyer takes advantage of its current capabilities to generate value in the acquired company that it considers will enhance capabilities that it already has, but has not developed. enough. These types of transactions generate additional profitability -measured in terms of annual return for the shareholder-, 3.9 points above the market average.

41% of deals studied in the document corresponds to this type of operation. Celgene Corporation became, in 2010, with the company Abraxis BioSciene, for 2.9 billion dollars, to develop its therapies against cancer and against inflammatory diseases. Our study shows that the proportion of this class of transactions varies, depending on the sector in question, and accounts for 62% of the pharmaceutical and health industries and only 10% of the banking, capital markets and management of assets.

To enhance or gain new capabilities

They are those operations in which a company buys another to gain capabilities that it does not have and that will allow it to enter highly competitive markets and environments. These are usually very disruptive sectors. This type of deals generate additional profitability -measured in terms of annual return for the shareholder- of 2.5% above the market average and it represents 32% of the operations analyzed in the report.

A good example was the purchase, in 2017, by Amazon of the company Whole Foods, for 13,600 million dollars, and that allowed Amazon to enter the world of food and sale through physical stores. The most active sector in this type of operations is telecommunications – 48% of its deals respond to this objective-, followed by automotive (46%) and industrial (46%).

They are not based on capabilities analysis

They represent 27% of the set of transactions included in the report Doing the right deals, and they are the ones with the worst return of the three categories analyzed. These deals They occur when the buyer does not take into account either his own capabilities or those of the purchasing company, and they tend to have a negative profitability -measured in terms of annual return for the shareholder-, of 10.9 points, on average, with respect to the market. Or, in other words, they are operations that, far from creating value, destroy value. The oil and gas sector is the one that brings together the largest number of these operations, around 62%, followed by transport and logistics (50%) and entertainment and media (44%) and financial services (44%). ). For example, in the case of the oil industry, many of the transactions that have taken place during the last decade in the United States have been exclusively financial investments that bet on the gas boom to the detriment of oil.

The study insists that not all transactions necessarily create value and estimates that 53% of transactions end up generating a return for the shareholder below the average profitability of the sector. But he also points out that The pandemic has accelerated the need for companies to transform and, as a consequence, is driving the most profitable M&A operations: in which the buyer seeks to access new capabilities or enhance those they already have. This type of acquisitions are taking place in everything related to digitization -customer experience, data analysis, electronic commerce … -, in terms of sustainability and decarbonization, and to reinforce a greater resilience of companies’ supply chains, among other issues.

For Malcolm Lloyd, Partner responsible for Transactions at PwC in the world, EMEA and Spain, “Our analysis confirms that the operations in which the buyer focuses on improving their own capabilities or taking advantage of those they have to create value in the company to be purchased generate a profitability higher than the market average (in terms of annual return for the shareholder). The fact that a transaction creates value depends more on the matching of capabilities between the two companies than on other specific motivations such as consolidation, diversification or entering new markets ”.

Malcolm Lloyd He adds that, “in the current scenario in which we find ourselves, the matching of capabilities between the buyer and the target company has to be at the center of M&A strategies. Now more than ever there is a greater need to integrate new and different capabilities for a company to generate sustainable value and results. The need to move quickly to close a trade increases the risk of not analyzing this aspect sufficiently and this can lead to a significant loss of value. However, the search and analysis of the fit of capacities in a transaction significantly increases the possibilities that it will generate value and an additional return ”.

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