{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
Pairing transformation initiatives with deals can help secure a company’s future
As the CEO walked out of the boardroom, she considered the daunting new strategic challenges just outlined by her directors. They expected the company to implement a major change to its product portfolio. To remain viable, the organization needed software-enhanced products, but the current industrial products platform was not built for the complexities of software. And the company still needed to meet aggressive growth targets expected by investors. Organic growth alone was not an option — a large acquisition would be required.
The deal model hinged not just on revenue growth, but also on scale-driven cost synergies. The integration would be complicated by business model changes, potential human capital disruption and new supply chain requirements. An acquisition was quickly becoming a catalyst for the transformation required to deliver the strategic imperative on the product portfolio.
The CEO wondered how the company could enhance its portfolio without disrupting short-term performance, reinventing the business to remain relevant over the next decade.
45% of CEOs believe their company won’t be viable in 10 years
What’s on the horizon for dealmakers?
The preceding scenario is a composite drawn from our experience with clients. While the specifics may differ across companies and industries, stories like this one are more common than ever.
That’s because many CEOs feel it's critically important to reinvent their businesses for the future. In PwC's 27th Annual Global CEO Survey, 45% of global CEOs said their organization will not be economically viable in 10 years’ time if it continues its current course.
Reinvention can be achieved via deals, transformation or a combination of both. Today’s acquirers and consultants do not think about deals and transformation in isolation or as sequential events. Executives plan multiyear journeys with a series of carefully orchestrated investments combining deals with transformation initiatives to help achieve success.
This additional complexity is a result of investors seeking greater returns even during challenging growth environments. In our view, value creation is now table stakes. To meet more ambitious growth targets, executives should explore opportunities to pair both acquisitions and divestitures with transformation to more quickly change their business model.
We’re already seeing this shift in the market. PwC’s 2023 M&A Integration Survey found that transformational deals — those that acquire new markets, channels, products or operations that fundamentally alter the organization — had jumped significantly to nearly half of all deals.
Recognizing transformation opportunities in M&A
There are important considerations for business leaders seeking to accelerate transformation through mergers and acquisitions (M&A). Successful M&A organizations proactively manage their portfolios and plan years-long journeys that help them thrive with a series of carefully orchestrated initiatives — both deals and transformation investments.
Historically, companies focused on realizing value by:
- Driving topline growth through product expansion, geographic growth and cross-selling and upselling of existing customers
- Establishing cost-efficient initiatives such as leveraging scale in procurement, back-office synergies, real estate optimization and IT rationalization
The areas below summarize how typical M&A value drivers can be reimagined as enterprise-wide transformation multipliers to help change the game. These acquisition value drivers and transformation multipliers are not comprehensive, but rather illustrative of the types of change that can be expanded upon for a large acquisition. Other transformations can exist in the current complex business environment to help address other megatrends affecting each industry (e.g., sustainability, digital innovations, workforce).
- Go-to-market
- Information technology
- Human capital
- Operations and supply chain
- Finance, accounting, tax, treasury
Go-to-market
Typical M&A value levers
- Upsell or cross-sell existing customers.
- Market expansion to new geographies.
- Sales and marketing organizational restructuring.
Transformation multipliers
- Enhance sales process, pricing and new business model opportunities.
- Realign or integrate front office business process and technology stack.
- Evolve from product- to solution-based sales.
- Enhance service and customer success process.
Information technology
Typical M&A value levers
- Rationalize business applications.
- Consolidate networks and data centers.
- Align IT organization models to support business requirements.
Transformation multipliers
- Improve service delivery model to mirror end-to-end processes to enhance value chain.
- Deploy applications to capture new functionalities and capabilities.
- Transition to the cloud for core business applications.
- Leverage third-party providers to gain agility and access new features.
Human capital
Typical M&A value levers
- Reduce redundancies.
- Enhance contingent workforce.
- Select low-cost health and wellness benefits.
- Consolidate HR vendors and technologies.
Transformation multipliers
- Improve service delivery model, including right-shoring, scaling shared services or global business services, and outsourcing.
- Implement strategic workplace planning, job leveling and succession planning.
- Embrace technology and digitize the employee experience.
- Improve employee journeys grounded in skills-based talent management.
Operations and supply chain
Typical M&A value levers
- Enhance manufacturing and distribution networks for the combined business.
- Capture third-party synergies on direct and indirect procurement, rationalizing suppliers.
- Consolidate capital planning process and allocation criteria.
- Combine operational support functions to deliver headcount efficiencies.
Transformation multipliers
- Consolidate demand or supply planning processes to improve tradeoffs through combined network and product portfolio.
- Remove bottlenecks from critical assets to drive incremental output.
- Rationalize data and systems (e.g., peer-to-peer, sales and operations planning, reporting dashboards, etc.)
- Develop new third-party spend and partnership strategies.
- Reevaluate make-versus-buy strategies considering the capabilities of the combined asset footprint.
Finance, accounting, tax, treasury
Typical M&A value levers
- Focus on short-term and long-term alignment of finance organizations to identify redundant roles.
- Consolidate finance personnel involved in transactional activities to leverage economies of scale.
- Outsource noncritical roles and increase labor arbitrage for insourced roles.
Transformation multipliers
- Leverage digital delivery models to improve the efficiency of older technologies.
- Leverage intelligent process automation (e.g., robotic process automation).
- Enhance reporting effectiveness via advanced self-service reporting solutions and upskill analytic capabilities.
- Explore managed services to reduce overall finance cost and simplify organization structure.
Finding value through divestitures
Thinking about reinvention also requires examining capabilities, products and services for which another company may be a better owner. Divestitures can be an important part of the equation for coupling deals with transformation. They can help accelerate transformation, allowing a seller to focus on strategic growth. Further, divestitures raise capital for redeployment into key acquisitions or other transformative initiatives.
In PwC’s research on the value of divestitures, we found that 57% of survey respondents that tried to fix a business unit rather than divesting it said the business unit’s value deteriorated or stayed the same. Companies that proactively review their portfolio and complete divestitures via prompt decision-making are more likely to create value. We found that companies that decided to divest sooner rather than later — while successfully navigating value traps — tended to generate greater total shareholder return.
In PwC’s research on the value of divestitures, we found that 57% of survey respondents that tried to fix a business unit rather than divesting it said the business unit’s value deteriorated or stayed the same.
Organizations evaluating deals and transformation should consider these questions
- How well does the organization identify and embrace transformational deal opportunities?
- How are the transaction and elements of transformation aligned with the company’s strategic plan?
- What is the combined transformation and deal value creation case and how can you share that message internally and externally?
- What new capabilities are needed, or which capabilities should be enhanced, to help drive the transformation?
Finding points for success and areas of challenge can be derived from answers to these questions. Driving deals and transformation requires careful consideration of the current organization and the pace to run at while avoiding tripping over oneself. Through our experience with clients, let’s discuss points to consider when launching your transact-to-transform journey.
Increasing the odds of success
To leapfrog the competition, companies should have a coherent strategy behind their deals and transformation initiatives. Here are four things company leaders can do to help drive transformation and deals over a multiyear journey:
- Communicate the future business model: Defining your company’s strategy for the future sets the North Star for impending M&A and transformational activity. Communicating the plan to both internal and external stakeholders is critical because transparency helps build trust in the organization. The destination may change over time, but being upfront allows stakeholders to get on the same page with the changes and adjustments that will likely be needed.
- Plan the journey: As companies reinvent their business model, they should develop a roadmap to allow executives across the business to work together toward the company’s transformation goals. Defining when and how each acquisition, divestiture and transformation roadmap starts and ends is critical to aligning the organization’s capabilities and skillsets to meet the end goal. Laying out a foundation for the journey, refreshing it as needed, and communicating with the key stakeholders is important to get everyone on the same page and driving a cohesive storyline.
- Embrace the opportunities for your people: Transformation allows you to create unique and distinctive opportunities for your high-potential leaders. The journey allows your brightest leaders and team players to grow and thrive — creating a sense of belonging to the new future of the company. Great leaders can grow and develop through the journey and create a set of individuals ready to lead the future company.
- Stay outcome-focused: Each deal and transformation should have discrete, outcome-based metrics to track and check its progress through the journey. Leaders should establish metrics early in the process, measure them often and then reassess those metrics periodically. There can be challenges and areas you can’t control (e.g., regulations, interest rates, geopolitical tensions), but setting up the appropriate key performance indicators (KPIs) allows teams to focus on what really matters for each transaction and transformation.
Systems and process integration is a critical enabler to move from transaction to transformation. Successful M&A integrations were 57% higher than others at fully integrating systems and processes.
What’s the plan to mobilize?
As executives and boards seek business growth and competitiveness, it's crucial to plan M&A strategy in alignment with transformation objectives. Be prepared to take advantage of opportunities that arise from changes in economic cycles and evaluate the transformational opportunities they could provide through M&A.
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Follow us
