Transform While Transact
How to transform a business in parallel to the M&A transaction
Market and technology trends such as the drastic changes during the COVID-19 pandemic and the ongoing digitalization and automation put increasing pressure on corporations to digitally transform their business and to re-evaluate their portfolio to ensure long-term profitability. Transform While Transact uses the drive of an M&A transaction to digitally transform the business being sold. In a carve-out situation, this holistic transformation increases the value of the unit being divested and, therefore, the overall deal value, in a time- and cost-efficient way.
Traditionally, M&A deals follow a certain pattern. First, the acquisition, merger or divestment is executed preserving the status quo. This is followed by the transformation of the organization, where the acquired business is redesigned as well as optimized and operations are adjusted according to the acquirer’s specifications. According to studies, somewhere between 70% and 90% of M&As fall short of expectations, and delays in post-M&A integration are one of the key reasons. These delays can drain the energy and excitement of a deal while leaving parts of the organization completely unchanged and far from optimized.
A forward-thinking strategy offers the possibility to run a holistic transformation in parallel to a transaction. During the transaction, key stakeholders within the organization have the mindset to envision the possibilities of transformational change. Leaders from both acquiring and divesting entities should use the energy and momentum from a transaction to transform and redefine their operations and the business model.
Transform While Transact: How to Execute
From a methodological perspective, a joint project setup between transaction and transformation team is at the core of the approach. M&A activities must be closely aligned with technology implementation and other transformation projects. Combining the usually top-down planning of the transaction to prepare Day-1 readiness and cutovers and agile implementation projects needs to be carefully aligned with a hybrid project planning approach.
Besides a suitable project setup, several technological accelerators can be used to deliver the required technology assets on time:
- Preconfigured application architecture: Preconfigured applications with industry-specific, standardized business processes are key to developing a new application landscape at the required speed.
- Cloud-based infrastructure: A modular and highly scalable IT infrastructure must be in place to support the fast ramp-up of new applications.
- Tailored and managed IT services: IT services that can be delivered directly by the organization during the transaction need to be taken over by an interim transformation partner to ensure business continuity.
With these key components in place, organizations can handle the parallel execution of a transaction early while performing the transformation concurrently without having to invest key resources into service provisioning or application separation.
Looking at the benefits of the approach, the following areas add the majority of the value:
Reach the target state faster
Driving the transformation and the transaction in parallel allows buyers to reach the target state of the acquired company much faster. Instead of subsequently executing the transformation, accelerators such as the pre-configured platform and the methodology can be used to parallelize without adding complexity for the buyer. This leads to significant cost optimization for the buyer.
Deal value increases
Besides the accelerated timeline, the seller can reach a higher valuation for the carve-out unit. On the one hand, the transformation increases flexibility and allows better timing. On the other hand, the efficiency optimization allows a reduction in operating costs. This helps the buyer to realize business benefits much quicker, without setting up expensive transformation programs afterwards.
Optimized investment spend
When carried out effectively, the approach offers a third advantage. Usually, a transaction brings in a momentum, and requires several carve-out activities in turn and significant project budget. With the Transform While Transact approach, significant synergies between the transaction project and the transformation can be realized.
Financial vs. strategic buyer benefits
Financial buyers lacking the intention to integrate the carve-out unit in particular attain large benefits from receiving a stand-alone business where no expensive TSAs (Transitional Service Agreements from the seller company) are needed and no technology transformation is necessary anymore. The transformed IT backbone offers reduced IT OPEX and accelerated business growth through, for example, the enablement of digital business models.
For strategic investors, this approach can also bring several benefits. Integrations become much easier when the purchased business unit runs on standardized industry processes and the IT landscape with state-of-the-art technologies. It also gives the strategic buyer the opportunity to utilize the target state of the purchased unit as a blueprint for parts of their own transformation.
When does it fit?
When possible, the best time to begin a transformation process is before a deal is even signed. Starting early can help to create a broader view of value creation opportunities and potential transformation results and benefits. Pre-deal transformation can provide a smooth landing for integration or separation. It is advisable to prioritize revenue and customer-originated processes, as well as operational support.
Furthermore, the size and the structure of the company matters, as do performance commitments made to investors and analysts. Depending on the individual size and structure of the existing IT landscape, the value of the approach may vary. Also the degree of change and disruption a company can withstand must also be weighed with the benefits such a change can generate in the particular industry.
For further details on the approach and how your organization might benefit from it, feel free to download the full POV or reach out to our Deloitte experts mentioned below.