Leveraging transactions as an engine for profitable growth is nothing new. Companies have long employed mergers and acquisitions (M&A) as well as carve-outs to expand market share through acquired capabilities or geographic reach, or to fine-tune operating models for core competencies and services. But there’s more.

M&A transactions can also be a catalyst for transformational change—either as the straw that finally forces a big shift, or as a more subtle nudge to hone rough edges in a company’s portfolio.

When and How to Use M&A as a Catalyst for Transformation

1. When transformation is a must. Sometimes a deal is so significant that transformation is inevitable. Consider a merger of equals between two companies each with an enterprise value of $1 billion. It’s almost guaranteed neither has an operating model to support the scale required for the new $2 billion company. Without a wholly new operating model and the people, processes, technology, and tools to support it, the deal wouldn’t make sense. Transformation in this case is a must.

Board considerations:

Directors should focus on supplying oversight at the very first stages of the deal regarding the future-state operating model, the plans to implement it, and critical risks. The human side of these deals—proper diligence and planning around how workforces and cultures come together—is critical. Boards should ensure management teams are just as focused on these elements as they are on closing the deal.

2. Clean up old acquisitions that were never properly integrated. When a company buys several businesses over time, but never fully integrates them, value from synergies and scale is lost. Organizational structures are redundant. Duplicative systems and technology cost more, and considerable time and money are spent translating between disparate processes and tools.

Board considerations:

Embarking on a new deal is a good time for boards to revisit past acquisitions to ask whether they were fully integrated. If not, the board should demand that the management team first clean up the legacy integration to both establish credibility and build repeatable processes as a gating factor to release more capital for continued transformative acquisition work. Done properly, these sorts of cleanups can significantly affect enterprise value through both rationalization and scale.

3. Solve talent headaches. As my colleagues, Matt Campbell and Colin Harvey, wrote last year, “many companies are feeling the pinch from the current talent gap.” New expectations, continued job vacancies, inflated wages, and other economic pressures have only worsened this issue since. M&A can be used to secure coveted skills (digital, data, and analytics), usher in a new class of strong leaders, or even improve the company’s diversity, equity, and inclusion profile.

Board considerations:
M&A can be used as a way to address some of the board’s most pressing talent agenda items. Directors should require rigorous human capital due diligence to identify key opportunities early on, pressure test management’s plans to keep key talent after the deal, and provide ongoing oversight as retention is a long game, extending well beyond the first 100 days.

4. Fix what’s broken and position for growth. Change is hard. In almost every company there are one or two projects that continually get pushed out because the effort and disruption required feels insurmountable. Cans are kicked. Dated technology and processes remain. Organizations that no longer meet the business’ current and future needs continue their suboptimal existence.

Chances are the big transaction a company is considering will require a significant amount of change, investment, and effort. The momentum and focus surrounding a transaction create opportunities to fix the broken things and position the company for growth.

Board considerations:

When contemplating a deal, boards should ask management, “What’s broken?” Is the human resources department no longer fit for purpose? Does the company’s financial planning and analysis system barely support the current organization, let alone the new one? Is there room to improve our environmental, social, and governance profile? The key isn’t knowing the problems, it’s asking the right questions of management so that they don’t miss an opportunity to use integration or separation planning as a way to fix them.

Seize the Opportunity

Whether a deal is transformative in nature or only for one or two areas of a company, the board can play a pivotal role in making sure significant value isn’t left on the table. Recognizing these opportunities, and supplying the proper strategic guidance and oversight, requires asking a distinct set of questions both at the front end of a transaction during discovery and diligence and during latter stages of integration or separation execution. Consider deal oversight through the lens of existing board priorities and agenda items, and you won’t miss out on transformative value opportunities.

Rachel Duran is a senior director with Alvarez & Marsal’s Corporate M&A Services group.

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