From transaction to transformation

By Gregg Nahass and Jim Smith

If last year’s strategy was about back to basics and staying the course, for many companies 2010 will be different. One sure sign: deal activity is poised to heat up. In this article, Gregg Nahass and Jim Smith, leaders in PwC’s M&A Integration practice, look at how leading businesses across diverse industries are seizing the opportunity and using deals to reinvent their companies.

Like so many things affected by what’s coming to be called the Great Recession, corporate mergers, acquisitions, and divestitures may never be quite the same. As deal activity begins to ramp up, companies are aware that the stakes have never been higher and are beginning to think about the right strategic moves: More than a third of multinational executives surveyed said that over the next 12 months their companies planned to purchase another business, pursue a spin-off, or sell part or all of a business.1 In a recent PwC survey, 69 percent of respondents anticipated increased levels of divestiture activity in the coming year compared with the previous 12 months.2

For some organizations, deals will be about survival; for more progressive companies, they’ll be about looking ahead to the inevitable economic uptick. Either way, the undertaking won’t focus merely on a timely, well-executed transaction. Now, more than ever, a deal offers the chance to fundamentally alter an organization for the better. In short, it’s an opportunity for transformation.

Under the best circumstances, mergers, acquisitions, and divestitures offer possibility and uncertainty. However, the post-financial-crisis landscape brings increased deal complexity, longer timelines to close, and more-rigorous due diligence required by lending institutions. In such an environment, a deal can be the trigger that changes the way an organization conducts business both within and outside the company— from adopting new business models, overhauling operations, and strengthening its management team, to entering new markets and more.

How can a company realize profound change through a deal? It takes strategic foresight, executive commitment, and relentless planning and execution—a tall order, to be sure, but one that many companies are navigating and successfully managing.

Transformation through M&A

Image: Figure 1

When companies consider mergers and acquisitions (M&A), they typically think in terms of deal value and synergies—that is, the advantages that can result from making the most of each company’s strengths, consolidating operations, and reducing costs. This mind-set is fundamental to any deal, but it is no longer the sole focus. More and more, companies are looking at how a merger or acquisition has the potential for transforming their front-office or back-office operations or, in some cases, both.

On the front end, a merger or acquisition can fundamentally change how a company interacts with its customers and trade partners. A business might pursue such a deal in order to (1) keep up with its competition, (2) grow significantly, or (3) redefine the products or services it plans to sell going forward. One US pharmaceutical company that we worked with conducted the acquisition of a European pharmaceutical company in order to greatly expand its market reach. The US company realized that the deal would affect every aspect of its business. It couldn’t have a siloed approach to integration, so it looked at the transformational impacts on all departments and functions: finance, human resources, global supply chain, commercial sales, legal, research and development, regulatory, and more. That broader and more holistic view helped the company navigate its transformation into a global pharmaceutical company. Prior to the deal, all of its operations had been US based, but with this large-scale acquisition, the company doubled in size overnight and began operating in 30 European countries where it had never done business.

On the back end, there might be transformational opportunities for companies to change internal operations and redefine the way they conduct business. A software or technology company undergoing a merger or acquisition may take the opportunity to reinvent the way it sells products to and interacts with its customers—an approach we refer to as digital transformation. By taking advantage of the Internet and other technologies, the company could integrate the disparate systems and business processes that govern its product development, sales and marketing, fulfillment, and service and support. The result? A unified customer experience that brings many potential benefits, including interactive relationships, customized products, new revenue streams, modernized delivery channels, and lower operating costs.

1 PwC, Management Barometer, November 2009.
2 PwC, Divestitures in difficult times, September 2009.