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Buy vs. Partner: Focus on capabilities

Deciding when M&A or an alliance is the right path to growth

Filling a gap or building on strengths

Capabilities can drive many deals, with companies exploring opportunities to enhance or leverage the things they do well. Where some companies stumble, however, is choosing a deal structure they’re comfortable with instead of closely evaluating how they could benefit from another company’s capabilities in a better way.

Some companies have realized that focusing on acquisition targets that can capitalize on the buyer’s key capabilities often increases the chances of M&A success. But acquisitions usually aren’t cheap, especially in the current period of high valuations for prime targets. In this landscape, companies are exploring if their pursuit of stronger capabilities could lead to alliances, joint ventures (JVs) or other types of strategic partnerships.

The decision to buy vs. partner depends in part on a company’s capabilities goal. How close a target’s capabilities are to your own can help shape the deal structure and likelihood of generating real value. If the capabilities in question are fully or mostly aligned with your current capabilities set – close to the core – an acquisition might make sense.

But with more deals crossing geographies, industries and customer offerings, it’s increasingly not just a matter of building on strength. The more factors that add distance from the core, the fewer potential synergies and opportunities to cut costs. That can make an acquisition more challenging, and an alliance or JV could be an appealing alternative, especially if other factors already could test a company’s control of the capabilities – a potential overseas acquisition, for example.

Key questions on capabilities

To determine how close a potential acquisition’s or partner’s capabilities are to your company’s core capabilities, consider these questions.

What kind of resources are needed to create value?

Hard resources could tilt the decision toward M&A, especially if that’s the only way to gain access. These include patents and intellectual property, facilities and equipment, and investment in research and development. But soft resources – employees and leaders, technology, and intangibles such as brands – may be better accessed through a partnership, which could leverage their capabilities collaboratively.

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How engaged in the resources will your company be?

If accessing and using the resources will involve much or all of your company, it may be better to acquire. Examples include a certain business process or operational technology. But a particular product or service set or geographic market may not create much overlap in capabilities, making an alliance a better option.

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How relevant are the resources to your core business?

Desired capabilities that are highly relevant to the core business could significantly improve a company’s market position or create a unique advantage, and may be best secured through M&A. Other capabilities may have a more moderate impact; they might be important to remain competitive, but they don’t fundamentally change company strategy or offerings. One example is expanding product/service distribution, which could be accomplished through a partnership.

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How redundant are the resources?

If there’s a high amount of redundancy, such as a big overlap in product set or geography, an acquisition is likely to be the right move. A JV could be harder to negotiate, and there’s the risk that a partner could be left with stranded costs. A partnership is more palatable if there’s only some similarities between the parties’ resources, as well as stark differences in how and where those resources are deployed.

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What are the competitive dynamics between parties?

The balance of strength in the capabilities of each party can shape the buy vs. partner decision. A company could pursue a target’s stronger capabilities through an immediate acquisition or a staged acquisition – an alliance with the option to buy later. If the companies have equally strong capabilities, a partnership can work if it has a clear strategic rationale, includes set boundaries and ensures the capabilities complement – not cannibalize – each other. An alliance also can head off potential culture clashes, especially in cross-sector deals. A fiercely independent startup may not want to risk being swamped by the bureaucracy of an established industry leader.

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Partnerships that enhance capabilities

Situations in which an alliance or JV can fill a gap or respond to a change in the market:

  • Financial services: Change in this complex and regulated industry usually doesn’t happen quickly. Adapting to new technology, changes in customer behavior and other shifts can be easier – and often faster – through an alliance or JV that allows a bank to test new services. Consider Zelle, a digital payments network backed by several US banks to compete against other payment platforms.
  • Airlines: Consolidation has slowed in the US, leaving a handful of national carriers. To access both international markets and smaller US markets, those carriers typically explore alliances that are less expensive than investing in facilities and employees in those markets. Non-US airlines also have extended coverage through alliances.
  • Oil and gas: Shifts in the medium- and long-term markets, customer segmentation and technology transformation make it difficult for oilfield services companies to place large capital bets. Alliances typically don’t require as much capital as M&A and can preserve flexibility for companies to adapt to future changes in an often volatile industry.

Partnerships that leverage capabilities

Situations in which an alliance or JV can build on a company’s strengths with another company’s products and services:

  • Pharmaceuticals: Companies often focus on a specific area, with a long and expensive discovery and development process. Pharma often has extensive sales assets and capabilities but less internal R&D than in past years, as alliances and licensing of R&D have become a more efficient and effective model. 
  • Retail: Many companies require both broad and differentiated offerings, yet they often face heavy cost pressure. Partnerships with manufacturers can improve product innovation. Some retailers also wrestle with fragmented market demand of certain products and underdeveloped supply chains – challenges that collaborative sourcing partnerships could help alleviate.
  • Telecommunications: Some mobile carriers provide service but don’t generate much content, while entertainment companies may want to extend their content to more consumers. One example is T-Mobile’s partnership with Netflix, which gave T-Mobile a content stream while Netflix picked up a new group of subscribers.

Gaining capabilities across sectors

Investing within the same industry can give companies access to capabilities that enhance their own core capabilities. But increasingly companies are considering how to leverage capabilities from outside their industry, leading to more cross-sector acquisitions and alliances.

From 2011 to 2017, 63% of alliances and JVs were between companies in different sectors, up from 53% in 2002-2010, according to an analysis of Thomson Reuters data by PwC and Ben Gomes-Casseres, a professor of international business at Brandeis University. Technology has helped drive these partnerships, with investments by healthcare and communications. The automotive industry is also understandably partnering with more tech companies, as autonomous vehicles have the potential to disrupt that industry and related business, such as insurance, auto repair and car services.

Going forward, many companies will need to consider where they can harness capabilities beyond their immediate sector. We’ve already seen a fair amount of that with technology deals, with a solid chunk of both acquisitions and partnerships involving non-tech companies. And consider the combination of Amazon, Berkshire Hathaway and JP Morgan Chase to tackle healthcare. That partnership may not have been imaginable a few years ago, but it’s a notable example of thinking differently when it comes to navigating disruption.

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Gregory McGahan

Financial Services Deals Leader, PwC US

Mel Niemeyer

Deals Partner, Deals Strategy Leader, PwC US

Mile Milisavljevic

Energy Deals Leader, PwC US

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