Now more than ever, executives are under unrelenting pressure to create more value for shareholders and stakeholders. Well-capitalized investors are looking for above-market growth, higher margins, and expanded capabilities. Technological, geopolitical, and other disruptions are increasing the speed with which companies must compete and affecting the very nature of competition. Higher interest rates and inflation have further compounded all these challenges.
In this environment, M&A offers executives a powerful lever for executing strategy, transforming organizations, and delivering exceptional value creation—and this lever can be applied across deal types and industries. Consider the following examples:
- A food processing company acquires a cutting-edge technology player to develop the next generation of digitally enabled products and services.
- A global industrial distributor pursues M&A not only to reshape its margin profile but also to design an industry-leading e-commerce platform.
- A consumer electronics company uses a series of acquisitions to reshape the organization from being functionally oriented to being brand-led and, in doing so, attracts critical new talent.
Of course, large-scale transformations like these are not the objective of every announced deal. Some deals are focused only on combining organizations, integrating talent, cross-fertilizing intellectual property, and delivering combinatorial synergies. Others seek to shore up supply chains or improve distribution. Regardless of size and scope, however, it is always useful for executives to take a step back and systematically explore ways to capture the most value from mergers and acquisitions.
All too often, once a deal is announced, leaders focus primarily on the mechanics required to stand up a viable, combined entity on day one and capture any near-term synergies. They may pledge to revisit transformation opportunities later in the process—and sometimes they do. But often other priorities emerge, and transformation discussions are deprioritized.
Our research and experience show that four factors are particularly important for leaders to focus on if they want transformational M&A to succeed.
- Strategy: Reimagine the combined business and organization
- Value: Identify and pursue the full-potential value creation opportunity for the combined entity
- Execution: Establish and empower an execution engine for the combined entity
- People: Attract and develop new talent and capabilities
Building and maintaining a transformational mindset is critical, too; it’s the only way leaders can devise bold integration strategies that create sweeping—not just incremental—change and lasting value.
In this article, we outline the opportunities for leaders to transform their businesses through M&A. Careful consideration of these opportunities should happen at every stage of the M&A life cycle—before target selection, ahead of due diligence, during integration planning, and after deal closing. We also suggest some principles leaders can follow to ensure that they don’t revert to thinking only about day one.
The opportunity to transform through M&A
When considering whether a transaction could lead to a core transformation, leaders can vet their opportunities based on how the deal could affect the acquiring and target companies’ strategy, value, execution, and people.
Strategy: Reimagine the combined business
Leaders in both the acquiring and target companies should reflect on the long-term strategy and operating model that would be required to get the most value from a combined organization. In some cases, they will start with a blank slate. In other cases, leaders may have wanted to pursue large-scale transformation all along—but, for various reasons, couldn’t. With a transaction in the offing, transformation becomes reality. Regardless of how they got there, leaders will need to articulate which parts of both companies could remain unchanged, which could be integrated or transformed, which should be exited, and the timing of those moves. As part of this strategic discussion, leadership teams should also review their portfolios and identify the capability gaps and noncore assets that may be candidates for divestiture. With this information, leaders can make critical decisions about whether and how to transform the core business—for instance, which functions and teams will be involved now and which might be involved in future transformation phases.
Value: Identify the full-potential value creation opportunity
Acquirers should perform a comprehensive value creation diagnostic and identify all possible sources of value from a deal, assessing every lever and function, including the effect of M&A on growth, margins, and capital. A bold and long-term view is critical: leaders should anticipate multiple waves of potential value creation over the next two or three years. Rather than play it safe, they should set financial and performance targets for the combined entity that are ambitious, and even slightly uncomfortable, although still rigorously evaluated.
Execution: Establish and empower an execution engine
For change initiatives to succeed, individuals must be both empowered and accountable. Acquirers may therefore need to rethink their governance structures in the face of transformation through M&A. To speed up decision making, leaders should set up an integration and transformation office (ITO) and actively engage and empower a large cross-section of initiative owners and transformation champions from both the acquiring and target companies. The concept of the ITO is not new, but in our experience, few companies support these offices with the required level of rigor, discipline, and transparency across the organization. This is not your typical program management office; it is empowered by the CEO and the executive team to drive all integration and transformation activities in short cycles, resolve issues quickly, and make decisions based on real-time, data-driven performance dashboards. The ITO’s radical transparency and accountability can help take some of the risk out of decision making and make it more likely that the combined entity will capture targeted synergies faster.
People: Develop talent and capabilities
Transformations can be effective talent accelerators, serving as key catalysts for executives to identify the next generation of leaders, put them in stretch roles, and build up their capabilities in ways that allow for success with future transactions and transformations. Indeed, acquirers and ITO leaders can start by identifying those skills and capabilities that will be required to deliver on their bold new aspirations. They can then acquire and nurture talent with different kinds of expertise, and they can establish learning and development programs that support and enhance transformation efforts. Doing so can help not only to ensure the longevity of current deals but also accelerate development of and expand the talent base for future transactions and transformations.
Transforming through M&A: Key principles to remember
There is always the risk that even the most transformation-minded executive will shift back into autopilot as integration challenges emerge. To guard against that, leaders should keep the following M&A and transformation principles in mind.
Reimagining the combined business
Take the time to think expansively. Despite the pressures associated with closing a deal, leaders need to pause and consider all the possibilities for value creation and a new operating model. To come up with a comprehensive and clear strategic vision for the combined entity, leaders should take an end-to-end perspective on how the deal will affect investors, employees, customers, and suppliers.
For instance, what if a company wants to be the preferred choice of customers for all their needs—what would it take? What new products, services, and business models could the company develop that would allow a step change in growth? Should the organization shift to global functions to enable increased scale? What best practices could be exchanged across teams and functions, and how would the employee value proposition need to change to attract the required digital and analytics talent?
Build a strategic integration blueprint. A good way to ensure that everyone is aligned on the plans to transform through M&A is to develop a strategic integration blueprint. The blueprint defines the depth and pace of transformation by individual functions over specific time frames. For instance, leadership teams in a merger may decide that, for business continuity, data center operations that are essential for customer service won’t change during the first six months of the integration. Similarly, a company may decide to protect the sales force in the first three months after a deal closes to minimize revenue disruption, but then transform the operating model 12 months later to enable sales across the company’s entire portfolio of products.
The integration blueprint can help to establish, at a very detailed level, which assets to protect (do not touch), which to integrate (combine), or which to transform (take a cleansheet approach) before any downstream integration work begins. The blueprint can also help to establish tight linkages across the deal rationale, the value creation objectives, and any tactical execution plans. The blueprint should be drafted early, during the due diligence phase, led by the ITO and supported by senior executives and functional leaders. They can ferret out any critical due diligence questions to be answered and interdependencies and complexities among functions. They can identify the transformation opportunities and determine the best sequence of actions to capture them.
Align on goals. Faster profitable growth and digital transformation were the goals in a merger of two industrial services companies. The two had a complementary set of product portfolios, but both organizations were highly fragmented, with multiple semiautonomous business units. For instance, the combined entity would have needed to integrate more than five enterprise resource planning (ERP) systems and data platforms. With that in mind, the leaders devised a detailed, expert-tested integration blueprint that covered financial, operational, and capability-building investments. Because the blueprint had been established up front, the combined entity was able to capture value more quickly than it would have otherwise—namely, a more than twofold increase in stock price and more than 40 percent of targeted synergies achieved in the first year of the merger.
Optimize the company’s portfolio as part of the integration. In most mergers and acquisitions, there will always be some acquired assets that don’t fit in the combined company. Yet executives are often slow to divest assets that that don’t fit the future strategy. It’s critical to assess each asset to determine its attractiveness and whether the combined entity is still the best owner. Indeed, our research suggests that successful acquirers divest one-third of what they acquire, and they do so quickly.1 A comprehensive review of the entire combined portfolio can reveal which noncore assets could be considered for divestment and can help leadership teams refine their M&A requirements for future acquisitions. Through this review, leaders can also identify opportunities to reduce debt.
Such an exercise can support a significant transformation in both a company’s assets and capabilities. For instance, one acquirer in the life sciences industry reviewed its entire portfolio and determined that, given its newly trained focus on its surgical business unit, it would divest a medical supplies business unit. The life sciences company also ended up pursuing several bolt-on deals to further its value creation goals in the surgical space.
Identifying full-potential value creation opportunities
Move aggressively on revenue, cost, and capital; activate the entire organization. McKinsey research shows that taking a full-potential approach to value creation in M&A can double a company’s likelihood of capturing synergies and exceeding initial goals by more than 20 percent, since revenue growth creates 60 percent of excess returns to shareholders.2 It’s critical to take stock of all possible synergies associated with a deal—whether the goal is to transform, integrate, or protect core parts of the business. Leaders need to use all manner of data to conduct this assessment—including executive interviews, current and historical organizational performance, benchmarks, subject matter experts’ input, and “radical thinking” workshops, where executives explore various theoretical scenarios such as: How would you prioritize growth if you had only 50 percent of the current budget? Leaders can then use this information to build a robust baseline and challenge the preliminary value creation targets that were set during the due diligence phase.
Taking the long view. The critical point here is to take a long-term view—anticipating several waves of potential value creation over a two- or three-year period. That is what leaders at one European packaging business did in a merger with a US counterpart. The leadership team built a robust baseline for all the European and US-based business units and led an in-depth financial diagnostic across functions. Working closely with the CFO and head of financial planning and analysis, the leadership team set ambitious full-potential financial and operating targets over a half decade. By taking the long-term view, the merged entity was able to realize a 45 percent increase in EBITDA and more than $1 billion in value creation for shareholders by the fifth year of the deal.
Building an execution engine
Create accountability and focus on speed. Strong governance is critical when it comes to M&A integrations, but even more so when pursuing transformation through M&A. Many organizations claim to have such governance in place and yet, in our experience, few support it with the level of rigor and discipline required to successfully deliver value over the long term. Often at the first sign of a value capture “boost,” leaders phase down their ITOs, work streams, and accountability efforts, satisfied with the immediate gains. Instead, leaders should lean into the success and double down. It can be helpful, for instance, to empower the integration and transformation lead, who, like the CEO, is focused on value creation and has the authority to make rapid decisions. It can also be helpful to identify and activate a series of initiative owners (from dozens to hundreds of individuals, depending on the size of the deal) who can own business case development and the planning and execution of initiatives.
As integration and transformation initiatives gain steam, leaders should also establish rigorous stage-gate approval processes involving the respective integration work stream sponsors, partners from finance, and leaders in the ITO. This group can draw detailed business cases and plans and help to determine the sequence in which they are being pursued, and how they are being funded and staffed. Additionally, leaders in the ITO should be conducting data-driven performance dialogues and frequent check-ins to hold initiative owners accountable, remediate risks and potential errors, and ensure that milestones are being met. For instance, the European packaging company mentioned earlier held transformation leaders accountable by adopting a scorecard system to measure the outcomes of various initiatives and scheduling weekly business reviews with the chief transformation officer.
Developing talent and capabilities
Launch a talent accelerator. Integration—and particularly transformation through integration—is a long game that requires a deep bench of talent and expertise. Acquirers will need to call on their A players (high-potential managers in their organizations) to plan and support the execution of transformation initiatives. Acquirers can also create vibrant employee value propositions, or revisit and update them as needed to support the creation of new roles and leadership positions for employees from the target company.
In this way, the integration process becomes a means to develop the next generation of talent—in the combined entity and in the acquiring company. Indeed, leadership teams may want to bolster their capability building with programs that focus on prioritization, problem solving, and influencing and persuasion—all themes that are critical for sustained transformation. They may also want to establish trainings in leadership development and various forms of functional excellence (operations, procurement, commercial).
Leadership teams may want to bolster their capability building with programs that focus on prioritization, problem solving, and influencing and persuasion—all themes that are critical for sustained transformation.
That was the case at one midsize chemical company. It used a merger to elevate the role of the procurement function: the companies in the merger, each with revenue of about $500 million, had historically used procurement solely for basic order taking and vendor management, and procurement teams rarely had seats at the table when operational and commercial decisions were made. All that changed after the merger. Roles within the function were elevated, and within the first six months of deal close, the company offered more than 100 hours of training to procurement employees so they could fulfill the function’s expanded responsibilities. Through the transformation, the procurement function went from the lowest maturity level to one that was functionally advanced.3
Not every merger or acquisition calls for large-scale transformation. But many deals represent catalysts for substantial change, as well as opportunities to create more value. Leaders need to take the time up front (balancing day one urgencies associated with M&A with longer-term strategy) to consider the transformation opportunities inherent in a deal. It will mean reimagining the combined business, assessing the long-term full potential value of the deal, building an execution engine, and developing the talent and capabilities needed to sustain change. It will require viewing traditional integration tasks through a transformation lens and taking a bold and strategic approach to change.
The effort can pay off: when leaders approach M&A with transformation in mind, organizations can achieve more value, faster, with less risk, and do so sustainably.