The Siren Song

Merger and acquisition (M&A) transactions are popular. Data shows that up to forty thousand M&A transactions occur globally each year (see figure 9-1). The aggregate value of these deals varies between $2 trillion and $4 trillion, depending on the year.¹⁰ On this basis, it is fair to say that you may have had firsthand experience with some level of M&A strategy in action: you may have worked for a company that was acquired, or perhaps you are in business development for your company and have orchestrated deals yourself. It will come as no surprise to learn that making an M&A transaction successful is hard.

So hard, in fact, that most deals fail. Our firm regularly reviews the performance of the M&A deal market and publishes the findings. Depending on the time period, they will tell you that anywhere from 60 percent to 80 percent of deals fail to create shareholder value, and many actually destroy value instead. Their analysis shows that for more than twenty-five hundred deals conducted from 1993 to 2010—a period that included two boom-and-bust economic cycles—the average total shareholder return two years postdeal was reduced by 10 percent, and that 60 percent of those deals actually destroyed value (see figure 9-2).¹¹

M&A Is Not a Strategy

Why, you may ask, with such poor odds, do companies continue to see M&A as such a compelling strategic option?

In our experience, companies undertake M&A transactions for a wide variety of reasons, some good and some less so: meet sales objectives, grow earnings per share, deny a competitor, enhance skills, diversify risk, obtain assets, gain strategic advantage, maintain independence, or even for bragging rights. But, despite all this, it is important to remember that M&A is a tool for strategy, not a strategy in and of itself. As such, it is the strategy behind the deal that matters.

We recognize two main culprits behind virtually all deals that fail:

• The buyer overpaid.
• The postdeal integration was poorly executed.

In our experience, once a deal is consummated, successful integration is determined by the quality of the postdeal process: strong leadership, a methodological approach, broad organizational buy-in, and focus on the value drivers. Successful integrations have dedicated integration teams, robust planning, a focus on overcommunicating, and well-planned talent-retention strategies.

Postdeal integration is a topic for another book. Here, we will focus on what happens before the deal: how the buyer can ensure it is isolating the deals that will be successful, and how it can avoid getting the price for those deals wrong.

All in the Price

What should you pay for a company? Three factors go into determining the value of a company to shareholders:

• The free cash flow profile that the company expects to generate from its operations over the short to medium term.
• The long-term time horizon for the company (and how those prospects affect the terminal or residual value).
• The risk, or the level of uncertainty, around the two preceding variables and the associated discount that accounts for it.

Conventional investment strategy follows a simple principle: find the highest value use for all assets. If the value of one of your assets is greater to others than it is to you, you should strongly consider selling the asset. This is where the concept of synergies comes in. Synergy is the term for the value that is created in a transaction. It can come from rationalizing costs that are duplicated across the organizations, costs such as labor, production assets, the sales force, and management teams. It can come from scale efficiencies, such as increased purchasing power. Then there are revenue synergies.

Revenue synergies are typically the hardest part of a predeal valuation to get right. They stem from the heart of the strategy behind a deal. When the buyer is betting that it can improve the commercial outcomes for one or both entities as a result of the deal, it is fundamentally betting on revenue synergies. We find most companies get it wrong.

How an Edge Approach Can Help

If a sound strategy is the key to ensuring the success of a deal, and if an edge mindset can be powerful in formulating such a strategy, what role can edge strategy play in M&A? We have found that edge strategy can be extremely helpful in M&A for the same reasons that it can position your company for success in its organic growth strategies—namely, helping you to make decisions that are lower risk, have a higher probability of success, require less investment, and generate higher margins by leveraging existing assets.

The edge framework focuses a manager on where her products fail to align with customer needs. It forces a manager to understand her customer’s journey. It challenges a manager to consider how a separate enterprise can deploy her company’s assets.

Let us review the edge framework and discuss how to apply it to M&A decisions.

1. Product edge applications. When companies explore a potential deal, they first examine the acquiring company and clearly define the company’s core offerings; it is important to examine each core offering separately in this process.

This examination leads us to the first key point to highlight: revenue synergies typically come from the interactions of core offerings, not companies. Take, for example, a hotel. You might say that it has one core offering: hotel rooms for travelers. But it might also offer meeting and event services to businesses. This product is very different; the customer is also different.

At the edge of each of these core offerings, in between what is currently offered and what customers give permission to offer, we can examine how a potential transaction would be accretive. This involves a very precise investigation of how the acquirer could add additional features or services by drawing on the target’s products and services.

Recognizing where such a product edge opportunity exists allows us to form the basis of a revenue synergy estimate. We must apply the same scrutiny to the target, asking what exactly are its core offerings and specifically what customers do the offerings serve. If our acquirer’s products and services can logically append to the target’s offerings, then we have good grounding for another synergistic opportunity.

Take, for example, when a hotel chain acquires a beauty-care brand, such as in 2004 when Starwood Hotels & Resorts Worldwide acquired the Bliss brand from LVMH. This type of product edge acquisition can generate a number of synergies, as the hotel provides access to its customers though new points of sale for the lotions and creams in the spa and, perhaps, a lobby boutique. But the brand can also be used for in-room amenities as part of the hotel’s core offering, which provides greater exposure to new potential customers. “It’s a perfect fit . . . an obvious platform for us—as a still fledgling beauty brand—to get our products into the hands of a very targeted market of travelers,” said Marcia Kilgore, Bliss’s founder, of the deal.¹²

As with any product edge strategy, this analysis must consider customer segments independently and how each is served by the various core offerings. Not all customers will value all options; failing to adequately examine the needs of each customer segment could mean missing an opportunity. At the same time, insufficiently considering each customer segment’s needs may result in an overestimation of synergy opportunities by failing to identify which customers will not recognize the value.

This methodical process of mapping core offerings to customer permission sets, one by one, looks for asymmetries that could indicate an edge. Critically, if the analysis does not identify any product edge opportunities from a potential deal, it should raise a red flag that revenue synergies may not exist in the transaction.

Product edges are also the first place to look when identifying possible targets. Many deals are executed on the basis that they will provide access to new customers. Product edge strategy adds needed discipline by asking, “Is the product or service being cross-sold sufficiently related to the acquirer’s core business?” If not, then the risk that the new customer will not give you permission to sell the new service—a common flaw in deals justified on this basis—is high.

Filtering for situations where the cross-sell opportunities are more natural product edges, versus big commercial leaps, is a great way to reduce the risk in the pitfalls of finding synergistic targets.

2. Journey edge applications. The customers of both the target and the acquirer should be studied in the context of their journeys. As detailed in chapter 3, it is important to identify opportunities to slightly expand participation on a customer’s journey.

• What is the end-to-end journey of each customer segment relative to each core offering (of both the target and the acquirer)?
• Do the offers of either company help to complete more of the journey of any of these identified customer segments?
• Again, if this analysis fails to identify a meaningful overlap, then the odds of finding significant revenue synergies decrease.

When screening for acquisition targets, the journey edge framework can be used as well. What activities does the company undertake and what other products or services does it encounter along the way? If a target can provide the capability to engage in such activities or is already offering these services, there is greater potential to create revenue synergies.

3. Enterprise edge applications. As explained in chapter 4, the enterprise edge can be the most complex, but is often the most valuable source of edge strategy. In the context of a deal, this is also true. Recall that an enterprise edge strategy is one that takes advantage of the existing foundational assets of your company when they can be readily leveraged as a new service or product offering. In assessing a transaction, a similar approach can be used to identify enterprise edge-based synergies. This begins with an audit of the foundational assets of each company.

• Do the companies produce any form of by-products?
• Where can they access spare capacity?
• Are there opportunities to rent out unconstrained assets?

Any identified target that can benefit from these enterprise edges may create not only revenue synergies, but also cost synergies. It is also possible for one company’s foundational assets to append to the offering of another company in the form of a product or journey edge. This is especially true for intangible assets like knowledge and data (as detailed in chapter 8).

A Dream Deal with Many Edges

In October 2005, Procter & Gamble (P&G) closed a deal to acquire the Gillette Company. An examination of the company’s stock price reveals that this was a great success (see figure 9-3).

What was behind this success? It wasn’t the acquirer’s ability to negotiate an abnormally low purchase price. P&G paid a fairly standard 20 percent premium over the market value of Gillette at the time of closing.¹⁴ The answer is that P&G justified the deal based on expected long-term synergies, both cost and revenue.

Initial reaction from the investment community was overwhelmingly positive. Warren Buffett, who was the largest shareholder in Gillette at the time, called it a “dream deal [to] create the greatest consumer-products company in the world.” P&G informed the public that the transaction created “future upside potential to its double-digit annual earnings growth target.” Wall Street analysts agreed. “[This is] a brilliant move strategically,” wrote Linda Bolton Weiser of Oppenheimer & Co.¹⁵

The reason for this optimism was that it was immediately clear that the managers at P&G and Gillette—armed with insight that is central to both product and journey edge strategy—could offer something to each other’s customers. Sure, both companies were in the personal-care industry. But P&G’s core was soaps and creams with a focus on female consumers; Gillette, of course, was a razor company, focused on men.¹⁶ The deal makers recognized that by using P&G’s product development expertise and production capabilities, it could expand the range of products marketed under the Gillette brand. Shave lotions, deodorants, shower gels—all targeted the male consumer; all leveraged P&G’s product technology and expertise.

This synergy went both ways. Gillette truly was a leader in blade technology and had been rewarded in the market with the runaway success of its Mach series of products. Combining this with P&G’s lotion products, the new company was able to market Gillette’s Venus razor brand for women with P&G’s Olay skin-care brand as a combination product.¹⁷

Both companies focused on different consumer segments, but by studying the journeys of each other’s customers (men’s grooming and women’s personal care and beauty), managers at both companies recognized three things. First, each company was not fully completing its customers’ journeys. Consumers were using other products in combination with its offering; for example, Gillette users also used after-shave lotions. Second, each company’s core offering could play a direct role helping complete each other’s customer journey. In the aforementioned example, P&G is an expert in the skin-care technology required to complete the shaving experience. Finally, P&G and Gillette recognized that their brands’ complementary strength gave them the permission to expand their collective footprint in the customers’ journeys.

These hit on all three of the edge types. Enterprise assets were leveraged in product design capabilities transferred. Product edge opportunities were captured by appending features to current products. Journey edge thinking was also used in adding products that extended their involvement in completing the consumer mission.

This wasn’t the only area of synergy in the deal; a further product edge–related synergy was also a key to the merger’s success. In addition to an important amount of cost synergy through rationalization, increased supplier strength, and removal of duplicated functions, the deal helped both companies in their geographic expansion goals.¹⁸

The deal has held up over time and justified management’s expectations. Examining the acquisition four years later, professor Rosabeth Moss Kanter singled out the deal as one of her “mergers that stick,” noting that “P&G met cost and revenue targets within the first year, incorporated Gillette processes considered superior to P&G’s, and continued to position itself for overall growth even as the [2008–2009] recession loomed.”¹⁹

“Roll-Ups” Using an Edge Mindset

NAVEX Global, an Oregon-based software company focused on corporate governance, risk, and compliance software, provides another example of how to effectively apply an edge mindset in identifying revenue synergies. The company offers a suite of services including compliance policy management, whistle-blowing hotlines, and other solutions designed to monitor workplace behavior.²⁰

NAVEX executed a series of “roll-up” transactions from 2010 through 2012.²¹ This ultimately resulted in an opportunity to achieve revenue synergies by cross-selling new products and services to existing customers of the various constituent companies. NAVEX itself was a rebranding of four separate software companies, each with a distinct offering and role in its corporate customers’ compliance and ethics journey.²² During the roll-up into a single $100 million entity in 2012, NAVEX’s CEO Mark Reed articulated to the marketplace what was essentially the potential for an edge-driven cross-selling strategy.²³ In Reed’s words, “[C]ollectively, the merged companies offer an unmatched level of experience and knowledge with a broad and complementary set of technology and content solutions to help global customers manage risk.”²⁴

Key to NAVEX’s success in these deals was that it employed the same methodology present in product and journey edge analysis prior to banking on the cross-selling opportunities that underpinned the deals. It knew it was dealing with the same customers and that the offers of each acquired company were on the edges of each other’s product offerings, making upselling a possibility. A further transaction helped to expand NAVEX’s role on the customer journey when it acquired PolicyTech, which produced a tool for managing cases that result from compliance breaches.²⁵

The financial markets were believers in NAVEX’s edge strategy, too. In 2014, the company was sold for a reported $500 million to a private equity investor.²⁶

Connection Failed: Revenue Synergies without an Edge

At the beginning of this chapter, we introduced the idea that making a successful transaction is hard, and even harder when it relies on revenue synergies. Now we examine a high-profile revenue synergy failure to see where edge strategy could have provided guidance.

In 2005, eBay, the online marketplace giant, bought Skype for $2.6 billion, plus the potential for a $1.4 billion performance-based milestone. At the time, Skype was a category-leading technology start-up with its offering of global internet-based video phone service.²⁷

When announcing the acquisition to investors, Meg Whitman, eBay’s CEO, declared that “by combining Skype with eBay and PayPal [an earlier eBay acquisition] we can create an unparalleled e-commerce and communications engine for buyers and sellers around the world . . . Communication is at the heart of community and e-commerce, making Skype a natural fit for eBay.”²⁸

eBay’s rationale for the deal heavily centered on the idea that Skype would complement its core business. It reasoned that enabling eBay’s existing customers to talk to each other in real time would make transactions easier and quicker.²⁹ This revenue synergy strategy was an effort to expand participation on the customers’ journey by connecting customers with a low-cost video phone service.

“Skype can accelerate the velocity of trade on eBay and accelerate the volume of payments through PayPal, while at the same time opening up some new lines of business and creating significant new monetization opportunities for the company,” Whitman explained. “We think Skype is a leap forward in online communications.”³⁰

Indeed, Skype and IP-based voice and video conferencing, in general, were a leap forward in online communication. Unfortunately for eBay, this had little to do with the online auctions business, and the deal itself turned out to be a disaster. The critical error was that eBay failed to both properly assess the customers’ permission set and truly vet the way those customers’ journeys were likely to unfold. It did not recognize that video chatting wasn’t a priority for its customers; they didn’t need, or particularly want, to video chat with each other in the context of an eBay transaction.³¹ The result was that eBay took a $1.4 billion charge in 2007 related to Skype and sold the majority of its ownership to private investors in 2009 (see figure 9-4).³²

If eBay had challenged its revenue synergy–based investment thesis from the perspective of edge strategy, we think it would have seen these red flags in advance. By completing a product edge assessment of its core offering, it would have explored separately each of its customer groups, both sellers and buyers, and mapped the permission sets of each. Exploring and engaging its customers’ use of the core eBay offering should have alerted it to whether those customers had a need for such a step change in the velocity of their transactions. Sure, eBay might have had a need for this, but were the buyers and sellers crying out that they couldn’t transact fast enough? It’s unlikely that many customers were.

A study of these customers’ journeys should have also brought the insight that the usage of video chat in supporting transactions was low. Indeed, the technology already existed; if this functionality was truly a valuable part of the customer journey, then there should have already been evidence of widespread usage in this context. But there wasn’t. Buyers weren’t jumping on Skype in large numbers to engage with eBay sellers during deals; why should they do so after the deal?

Turning to Skype, a diligent manager would have found even less synergy. Skype’s, and eBay’s, customers were executing on entirely different missions: connecting with family and friends in the first instance, and buying and selling goods online in the second. It is hard to see how these customers would have a compelling, unmet need to facilitate transactions with family and friends while participating in Skype’s core communications–focused offering.

The reality was that there was not enough synergy in the deal, and as such, eBay could not support the premium it paid for the company. eBay had bought a communication asset, unrelated to its core offering and, worse still, one whose core proposition was not on its customers’ journey. The discipline of an edge approach would have helped eBay recognize this.

Blockbusters and Bolt-ons: Edge Discipline Wins in Health-Care Deals

An edge mindset can also help explain the relative successes—and failures—of some of the biggest powerhouses in the health-care industry. Observers of that industry will be familiar with the shifting complexion of its key players. At the turn of the last century, all the accolades went to the big pharmaceutical companies, “big pharma.” Big-name branded drugs were making billions of dollars for the likes of Pfizer, Astra Zeneca, GSK, Bristol-Myers Squibb, Merck & Co., and Novartis. These so-called blockbuster drugs—drugs that typically net more than $1 billion in annual sales—were the focus of nearly all strategic initiatives. Pfizer alone went to market with eight of these drugs in 2000: Lipitor, Norvasc, Zoloft, Neurontin, Celebrex, Zithromax, Viagra, and Diflucan.³³

This focus promoted an approach to acquisitions based on the blockbuster strategy, too. The central concern among big pharma executives at the time was “how can we fill the development pipeline with more blockbusters?” They, of course, hoped that the in-house research and development teams would produce some hits, but in order to maintain a constant revenue growth story for investors, the executives also realized that they needed some help from outside to fill in the gaps. This is where transactions came in. And when you consider that the largest big pharma companies at the time, Pfizer and GSK, each had global revenues in excess of $20 billion in 2000, you can see that some of those gaps can be very enormous.³⁴

The result was a lot of transaction activity. Big pharma got bigger but, as a side effect, also broader, picking up consumer health businesses, animal health products, and nutrition assets from others and from each other as part of these blockbuster deals.³⁵ At some stage, you could argue that acquisitions, which were supposedly an activity designed to support the core by filling in product line gaps, had become the core business itself. And one that was not sustainable. Since 2012, the industry has spoken of big pharma slimming down, with many of these transactions being reversed as players trade noncore assets back to players for which they are a better fit.³⁶

From an edge perspective, these moves broke the rules. The transactions took the acquirers into new markets with new customers unrelated to their existing product offerings. And just like Charles Miller Smith at ICI, big pharma entered into businesses unrelated to, and therefore unable to leverage, their foundational assets or customer relationships. While some of this diversification was collateral damage due to the pursuit of blockbusters, the moves were certainly not taken with an edge mindset.

But, you may argue, the mega-companies were looking to fill mega-gaps in the growth expectations. Is restricting your focus to your edge sufficient? In order to grow at this scale, do you need to employ a diversification strategy, not just incremental moves? The case of Gilead and other so-called biotech companies suggests otherwise.

Gilead Sciences was founded in 1987 by twenty-nine-year-old Dr. Michael Riordan, with a $2 million investment by Menlo Ventures.³⁷ Today, Gilead has revenues of $20 billion and a market cap of $148 billion.³⁸ Gilead is what would be described today as a “big biotech.” In contrast to the big pharma companies, Gilead and its peers use biotechnology in their core business. This distinction relates to how they each make their drugs.³⁹

But the distinction doesn’t stop there. Nearly all biotechs like Gilead grew from start-ups over the last twenty years.⁴⁰ And they have a very different approach to growth, one that is more in line with an edge mindset.

Like Gilead, the big biotechs—such as Biogen Idec, Amgen, and Genentech—tend to be much more focused than their big pharma peers. They focus on core therapeutic areas and technologies and grow their businesses through bolted-on acquisitions, not broad diversification moves. But, despite this, with revenues in the tens of billions of dollars, these companies are starting to rival big pharma in size and scale.

Gilead started out as an infectious disease company, and this largely remains its core business focus today. It built a highly successful franchise in HIV therapies.⁴¹ When the company decided to expand, it stayed within the universe of infectious disease. In December 2002, it bought Triangle Pharmaceuticals to enter the hepatitis B market.⁴² Gilead’s experience in developing therapies for infectious disease helped to ensure that the success in treating HIV was replicated with hepatitis B. This leveraged its knowledge edge. It had developed a foundational asset in the infectious disease know-how and leveraged it to ensure success in transactions like the Triangle Pharmaceutical deal.

Furthermore, Gilead’s know-how from a regulatory perspective (how to construct and interpret infectious disease clinical trials) and the knowledge it built regarding how to produce combination therapies for HIV all proved critical to its success in bolted-on expansions.⁴³ Gilead even developed an effective tiered-pricing model (which enabled its HIV products to be sold globally) that it was able to leverage for its other infectious disease therapies.⁴⁴ Its biggest transaction to date, acquiring Pharmasset in 2011 for $11 billion, enabled it to take the lead in hepatitis C therapy, a move that is expected to deliver an incremental $20 billion in revenue.⁴⁵ By any standards, this move is a major success for Gilead, a transformation to its business. Yes, this was done while remaining on the edge of its core. Its know-how and expertise in infectious disease and hepatitis gave it an advantage in seeing the potential of Pharmasset and in bringing its therapy to market. Coincidentally, around the same time, big pharma companies were beginning the process of jettisoning many of their failed diversification assets.

Why is Gilead’s growth strategy consistent with an edge approach? While some of the earlier examples we have covered leveraged the product and journey aspects of edge strategy to support successful deals, Gilead’s edge strategy is focused on its enterprise edge. The company leveraged its knowledge and expertise to ensure success in its transactions. Its underlying growth strategies were predicated on this. Just like Major League Baseball, which, as discussed in chapter 4, realized that its technology for streaming online content wasn’t uniquely valuable to baseball and could be leveraged to support other sports- and nonsports-related media, so too did Gilead realize that all it had learned and developed for HIV therapy development wasn’t uniquely valuable to that disease. It was empowered to take on other infectious diseases like hepatitis—and win.

Seed Capital: Initiating Edges with M&A

If M&A is a tool for strategy and edge strategy is a path to growth, then we must come full circle and ask ourselves, “Does M&A have a role in edge strategy?” Our experience is that this is indeed the case. When looking at how to take advantage of an identified product or journey edge opportunity, an important option that you must not ignore is whether a small acquisition can be used to jump-start your strategic move.

Take, for example, how Best Buy seeded its journey edge strategy with an acquisition. Geek Squad was founded in 1994 by Robert Stephens, the firm’s self-styled “chief inspector.”⁴⁶ As personal computers became more popular in the 1990s, Stephens found a niche business in technical support and repair of the machines. By 2002, when Best Buy acquired his company, there were sixty employees that generated $3 million of annual revenues.⁴⁷

For Best Buy, the small acquisition solved a particular problem. Store managers noticed that customers who had bought a computer from the store were starting to return with requests for help getting the computer started; in those days, the start-up manual often ran several hundred pages and was full of technical jargon. Typically, customers would go to the in-store help desk, where Best Buy associates would do their best to troubleshoot.⁴⁸

The trouble was, more and more people started to do this. Concerned about rising customer dissatisfaction, as well as the rising cost of handling the requests, Best Buy’s executives found the solution with Geek Squad.⁴⁹ It provided a paid professional help service that could accomplish a product edge, upselling trifecta for “convenience,” “relief,” and “peace of mind” customer needs.

Gradually, Best Buy’s managers realized that Geek Squad could help with the full range of consumer electronics goods sold across its stores, because no longer was it only computers that were difficult to get working. As Brian Dunn, president of Best Buy’s retail operation, once put it: “As our products become more complex and more connected to each other, consumers are shifting from ‘do-it-yourselfers’ to ‘do it for me.’”⁵⁰ Jeff Severts, vice president of Best Buy’s services division, agreed: “Anybody can sell [you] a TV or a computer or a cellphone. The real value is in finding someone who can get this stuff to work for you and can keep it working.”⁵¹

As Geek Squad proved to be a success, it attracted further investment. By 2010, Best Buy employed twenty-four thousand Geek Squad agents.⁵² There is also a major central service depot known as “Geek Squad City.”⁵³

A $3 million company has grown to a $3 billion journey edge business for Best Buy.⁵⁴ In addition, analysts estimate that it enjoys a profit margin of more than 40 percent, compared to less than 5 percent in the business overall. Furthermore, Best Buy now enjoys an enhanced relationship with customers.⁵⁵

As the company has continued to evolve its retail model, its focus on the journey edge has remained. In one of his first comments after becoming chief executive of Best Buy in 2012, Hubert Joly said, “We believe that price-competitiveness is table stakes. The way we want to win is around advice, convenience, and service.”⁵⁶

Diversification as a Risky Rationale

Diversification is a popular strategic rationale for transactions, as seen in the strategies of big pharma and ICI that we discuss in this chapter. It seems somehow at odds with everything that makes edge strategy work. We do not argue that diversification is a unilaterally bad idea. There are, in fact, examples of companies acquiring their way to diversified success; Johnson & Johnson has proven highly effective at doing this in the health-care space.⁵⁷ However, we recognize that this is a risky strategy and often fails. Moves like these have a hard time creating synergies to support the cost of a deal and also struggle to leverage existing assets and capabilities to facilitate integration.

As to whether we recommend exploring diversification strategies, we tend to adhere to the school of thought that diversification should be left to the domain of investors and that management teams should instead focus on maximizing the growth of their existing businesses, either organically or inorganically.

Practitioner’s Notes

• Corporate transactions are both commonplace and exceedingly difficult to execute. However, we believe that edge strategy can help guide success in mergers and acquisitions.
• M&A is not a strategy by itself; rather, it is a valuable strategic tool to deploy in executing a larger strategy of growth. An astute manager will frame potential acquisitions as part of an edge strategy. Where she fails to see strategic value, she should be wary of the potential for an acquisition without an underlying strategic direction.
• The majority of M&A deals do, indeed, fail to generate shareholder value. Many reasons cause this failure, one of which is misinterpreting the potential for revenue synergies. Edge strategy is a valuable discipline for identifying, understanding, and derisking these important cash flows.
• The edge strategy framework is applicable at all stages of the deal life cycle, ranging from sourcing to screening and synergy valuation:

  – Product edge strategies focus on how two companies’ offerings can be combined to create the enhancement and upselling opportunities. Procter & Gamble’s acquisition of Gillette and the roll-up transactions of NAVEX offer examples of how the acquirer’s and target’s product catalogs were successfully merged together to create product edge opportunities.

  – Journey edge strategies point to partnerships where the company can seek and be granted permission to extend its participation in the customer’s journey. By recognizing an unmet customer need for convenient and effective technical support, Best Buy’s timely acquisition of the start-up Geek Squad allowed the retailer to redefine its role in the customer journey and laid the groundwork for a long-term transition into a services-focused company. In contrast, eBay’s purchase of Skype offers a glimpse of a journey-based acquisition that failed several key edge tests.

  – Enterprise edge strategies often require the most outside-the-box thinking, but can yield startling returns. By creating a careful inventory of the acquirer’s and target’s foundational assets and submitting each to the test of identifying alternate users in new business contexts, a company can begin to identify enterprise edge opportunities. Gilead’s inorganic growth strategy (especially when contrasted to its acquisition-heavy cousins in big pharma) provides a compelling example of a company that has integrated an enterprise edge mindset into its deal function.

• In summary, an edge mindset can be applied to acquisitions of all sizes—large and small—and should provide a valuable perspective in any deal situation. The story of big pharma’s acquisition spree provides a cautionary tale—one heeded by biotech companies like Gilead Sciences—against an undisciplined inorganic growth strategy. In contrast, Best Buy’s modest purchase of a $3 million company called Geek Squad, while small at the time, has had a transformative impact on the giant retailer. What is absolutely critical in all of these situations, regardless of the size and budget of your deal team, is that you carefully identify the edge opportunities the deal will create and validate that these opportunities will, in fact, bear fruit.