Transformational M&A

Are you ready to redesign your business?

Transformational M&A and deals can provide access to new capabilities and talent that are critical to creating value over a shorter time frame than organic growth. Having a process to determine whether your business can benefit from strategic acquisitions, joint ventures (JVs), spinoffs and divestitures is a key to success.

The math of acquisitions: 1+1=3

In recent years, many companies have turned to M&A to address different goals over both short and extended time horizons. Goals have included moving closer to customers, leaving challenged sectors and speeding up digital transformation. Whatever the objective, the market can be impatient and one of the fastest ways to accelerate transformation is through M&A.

Not every business opts to transform through an outright acquisition. Some prefer to strike a joint venture or to divest a business unit instead.

Joint ventures can be attractive alternatives because they remove the pressure that most public companies face in making deals work on a cost/synergy basis. Many JVs take a page from private equity firms, which look ahead to an exit strategy of assuming control or spinning off the unit within a few years.

Divestitures can help executives focus their attention and resources on more profitable units. They also allow companies to group together business units that share similar growth stories. And they can generate capital that can then be redeployed into the core business.

Recent high-profile examples of transformative M&A deals include:

Royal Dutch Shell and BP
Costco
Walt Disney and Fox

Royal Dutch Shell and BP

In a series of relatively small deals, these energy titans have been preparing for a seemingly inevitable transition to a net-zero emission future. Neither company is abandoning its current hydrocarbon emphasis in the short term, but both are accumulating assets, expertise and talent to prepare for a transformational shift later on. Shell recently bought solar and energy storage developer Savion and invested in solar power operator Silicon Ranch. BP bought Chargemaster, Britain’s largest electric vehicle charging company, for $170 million, and invested $200 million in solar development company Lightsource.

Costco

In 2020, Costco acquired Innovel Solutions for $1 billion, to increase its penetration into the large appliance and furniture products market. The deal, Costco’s biggest acquisition in nearly two decades, beefed up the company’s ability to deliver bulky products in the final mile.

Walt Disney and Fox

Walt Disney’s $71 billion acquisition of 21st Century Fox from Fox Corp. gave Disney a huge number of film assets, better positioning it to compete with other streaming services. From Fox’s perspective, the divestiture provided focus through transition service agreements (to support current operations) and gave the company the capital it required to replatform its core technology and operations. Fox’s divestiture also enabled a focus on growth aligned with the strategy of live content and digital excellence (e.g. products and ad-based video on demand/streaming).

Is your business ready for transformational M&A activity?

Despite all the potential benefits, M&A doesn’t often end up creating as much value as many executives hope. PwC research has shown that 53% of corporate acquirers underperformed their industry peers. There are several reasons for this, including mismatched company cultures, technology troubles and losing key talent. Another contributor is a failure to achieve go-to-market goals.

To determine whether your company is positioned for such a move, consider a process that includes addressing the following questions:

Source: PwC research: Doing the right deals.

Is my corporate strategy updated/relevant?

COVID-19 and recent geopolitical disruptions have shifted strategic imperatives, altered supply chains and boosted the need for digital transformation. Those are some of the new realities that companies need to consider – not to mention emerging imperatives such as entering the metaverse or preparing for a net-zero carbon emission world. Companies should regularly review and optimize their business portfolios to facilitate alignment with up-to-date strategies.

Can my business respond organically?

If your strategy has shifted, the next step is to determine how and when to address making the necessary adjustments on the ground. Do you have the talent pool internally required to address key issues and respond to a new strategic push? Do you have the right inventory of intangible assets? Do you have the liberty of time to build up your capabilities internally – or do you need an inorganic deal to help you get there faster? PwC research has found that strategic intent of a deal has little to no impact on value creation. What generates value—and a positive total shareholder return (TSR)—is a capabilities fit that can allow companies to leverage or enhance their capabilities. The alternative is a limited-fit deal that can result in a significant loss in TSR following a transaction.

Is my portfolio optimized?

If you need to acquire expertise, assets or talent to enter into a new or adjacent business, examine the focus of existing businesses within your portfolio. Non-core units can soak up too much management time and operating capital. Divesting such units generates capital that can be deployed in other areas that are more central to the newly established strategy.

Am I set up to execute a deal?

Integration and execution should be considered at the onset. Most M&A deals fail to meet expectations. For instance, while 65% of executives tell PwC that access to talent was either “very important” or the “most important” goal of an acquisition, only 10% of firms reported “significant success” in post-M&A employee retention. To make sure that a deal doesn’t become a cautionary tale, executives should have a clear strategy behind the deal and understand how it will create value. Start early with comprehensive due diligence, and carry that same energy and commitment to integration planning. Acquirers often overlook integration in the early stages of M&A, but successful integration can help drive transformation. If you want the deal to create the anticipated value for your company, early planning for transformation is essential.