Strategy & Corporate Finance Practice

Using M&A as a
launchpad for
transformation
Transactions can play a significant role in large-scale transformation,
presenting a time of intensified focus on change and a heightened
sense of ownership and accountability—the building blocks
of transformation.

March 2024
M&A can offer a powerful lever for executing
strategy, transforming organizations, and delivering
exceptional value creation. In this episode of the
Inside the Strategy Room podcast, two McKinsey
experts talk about how executives under pressure
to create more value for shareholders and
stakeholders can benefit from using a transaction
as an opportunity to transform the entire
organization. Alex Liu is a partner in McKinsey’s
Minneapolis office and a leader in our M&A practice
who helps clients execute large-scale mergers,
with a focus on growth-based transactions. Chris
Hagedorn is a senior partner in our St. Louis office
who is a leader of our global transformation
practice and focuses on transformational M&A.
The pair recently coauthored a new article, “When
a transaction forges a transformation.” This is
an edited transcript of their conversation. For
more discussions on the strategy issues that
matter, follow the series on your preferred
podcast platform.
Sean Brown: Why is M&A an opportunity for
launching a transformation?
Alex Liu: When you think about corporate-wide
change, there are really few things that catalyze
something like a transaction where you’ve got
public commitments to your external markets or to
your board.
Chris Hagedorn: For some deals it can be a
once-in-a-lifetime opportunity to unlock value.
Revenue and growth opportunities are increasingly
becoming a larger part of the overall deal thesis,
along with opportunity, value creation, and
repositioning the business with customers. And we
also see that this could be a powerful catalyst for
change for many different reasons that might
be on the M&A agenda or the company agenda.
Transforming while doing M&A isn’t for every deal
or company. We’re also not saying you need to relax
the rigor that needs to go into proper planning
for integration and synergy and value capture.
However, for certain deals where there’s a
significant opportunity and/or it’s a prerequisite
to capture significant upside value and also to
do it quickly, transformation will help increase the
odds and increase the probability of success in
your next M&A transaction.
Sean Brown: How do you know when the
opportunity is right to pursue a transformation as
part of an M&A transaction? Are there indicators
you use, like the size of deal relative to size of
acquiring company?
Chris Hagedorn: Typically, the size of a transaction
is a good indicator, especially if you’re bringing
together two equal-sized companies with
significant heft in terms of revenues, customer
footprint, and employee base. Another factor
is the degree to which your deal requires a
significant lift in financial or operating performance
or performance safety or sustainability, where
you need a dramatic departure from your
current level of performance. That can include
distressed acquisitions.
Alex Liu: I would think about what you’re trying to
do with your customers. If you’re really trying to
access a whole new base of customers, perhaps
through a new channel or distribution or e-
commerce, or you’re thinking about creating an
entirely new set of offerings, that would be another
marker of transformation, because your company’s
going to have to do vastly different things.
Conversely, if you’re just doing a simple product or
IP tuck-in, which many M&A deals are, that’s likely
not a transformation, because you’re largely
leveraging the current asset base that you have.
Using M&A as a launchpad for transformation 2
Chris Hagedorn: I always say that if the board, or
the CEO, CFO, or chief strategy officer have a lump
in their throat when they think about how they will
pull this off and how much they’re committing to in
their business case, that’s probably an indication
that transformation might be the right fit.
Sean Brown: Can you take us through how you
would approach the transformation when a
transaction is the main driver?
Chris Hagedorn: There are four key elements:
strategy, value, execution, and people. Getting
strategy right is critical to the other three. The
question is whether you are actually reimagining
the combined business. The management team, the
CEO, and the board need to spend the time asking,
“What is our M&A strategy? What actually are the
targets we believe fit within that strategy?” Often
acquirers miss that first step when they start
identifying opportunities for deal rationale for
individual targets. They need to develop a renewed
vision for the combined enterprise, and in a
transformational deal they need to understand
the opportunities for growth.
It’s important to look at the customer cross-
section. Who are your customers? What are
the opportunities for growth and for margin
enhancement? Will your organization be structured
and transact as it does today with a renewed
operating model? Or is there an opportunity to
do something different with how you reach
customers and engage with stakeholders and
suppliers, so that you enable a truly renewed
vision for how the company will operate going
forward? Aligning the top team around those core
elements is critically important. And there is no
one-size-fits-all blueprint—it always needs to be
tailored to the context, applying past lessons
learned to the individual transaction while also
looking at finding the edge of that new vision.
Alex Liu: Transformation is not monolithic. You want
to transform selectively while also taking a lens of
protecting the base business and ensuring that the
organization is not overwhelmed with too much
change at once.
Sean Brown: Would this also work in a divestiture?
Alex Liu: Yes, because in both cases you’re really
taking a thoughtful lens around “What are the
markets that we should be playing in? Who are the
customers we should be serving? Where are the
geographies we should be playing in?” But it’s
important to realize that transactions are not a
substitute for good strategy. For transformation
through transactions to work, you have to have a
very clear strategy overall, with M&A as a
component. That defines the right transaction.
Chris Hagedorn: Some of the most impactful
transformations that I’ve been a part of have come
as a result of setting the right strategy for the
company, divesting certain business units and
areas, and actually then transforming them. The
need to transform and redesign organization
structures is just as important in a spin-off or
divestiture, to make sure you’re right-sizing the cost
structure and tailoring the business processes and
operating model appropriately.
Sean Brown: Can you share any case examples of
setting this broad strategy and then launching an
M&A-driven transformation?
Chris Hagedorn: A global luxury consumer
goods producer had an opportunity to pursue
a transformational acquisition of a distressed
brand with markets, customers, and products
complementary to the acquirer’s. The acquirer’s
CEO and board decided to use the transaction to
fundamentally change their operating model,
reorienting from a functional P&L structure to a
Using M&A as a launchpad for transformation 3
brand-centric structure to further enhance their
go-to-market and marketing presence. First,
they reassigned their business units, and put
presidents over each. Next, they shifted over a
quarter of their sales to a lower-cost, direct-to-
consumer channel to increase margins and overall
revenue and sales. They also changed their
operations and go to market across the enterprise,
setting aggressive targets and launching about 100
initiatives with individual owners to achieve the
value-capture plans. Ultimately, they far exceeded
their 20 percent EBITDA lift target and instead
achieved more than 30 percent, and increased
their enterprise value by more than half in just
18 months.
Sean Brown: Once you have the strategy in place,
what’s next? Your article talks about identifying the
full-potential value. Can you take us through what
that means?
Alex Liu: Many transactions do well at protecting
the base business. But we would encourage
companies to take a full-potential mindset, looking
at leveraging the transaction as a catalyst to
explore. In the case of cost, that could mean
pursuing off-shoring and outsourcing. In the
case of revenue, that could mean pursuing new
digitally enabled business models or a new go-to-
market channel.
To get there, step one is really assessing what
is possible, including competitive benchmarks and
your current performance. We call that
“independent diligence,” taking a real cleansheet
lens to all potential opportunities. The second step
is deciding targets for your workstreams, assigning
line leaders to develop initiatives and run them
through a detailed development process of building
a business case and implementation plan, which, if
validated by your findings, becomes a bankable
plan. You will want to think about a holistic
integration financial plan for every area, every
initiative, and every month so you can just simply
track and manage when you are ready to execute.
Sean Brown: Are there pitfalls involved?
Alex Liu: Failure to set the aspiration high enough
is a common problem. Whatever your public or
external commitment is, shoot for a minimum of
30 percent above that internally. Many companies
even set a goal that is 100 or 200 percent over
external targets. Another common mistake is failing
to activate a broad set of line leaders, and instead
limiting the thinking about what is possible to the
C-suite level. That prevents ownership from
penetrating into the organization. Another mistake
we see is waiting until well after a close to
implement a holistic financial plan. You want to
have this within the first 30 days or 60 days post-
close, if not sooner.
Sean Brown: How do you communicate these
opportunities to the organization and to investors?
Alex Liu: Externally, you want to take a fairly
conservative view with commitments that you beat,
while setting more bullish internal goals and thinking
about raising the aspiration. The promise to
customers and employees is as important as the
dollars and cents, so the change story has to equally
hit on the hearts and minds and the heartstrings as
well as the financial benefits.
Chris Hagedorn: Obviously, with privately held
companies, you have more latitude to stretch a little
bit more, but the IR [investor relations] strategy is
always one that needs to be tailored to the context
and your confidence in achieving the goals that you
set out.
Sean Brown: It would be great to hear an example
of how a company actually applied these principles
to capture the full-potential value.
Using M&A as a launchpad for transformation 4
Alex Liu: In an industrial sector merger of equals,
the parties explored all value pools, looking
holistically at revenue, working capital, and cost.
They ran 100-plus initiative owners across the
enterprise through a very detailed, bankable-plan
process, validating each with a business case,
impact sizing, and implementation plans prior
to the closing of the transaction. They also
established a digital platform that enabled further
transactions and shifted to shared services.
Together, these moves helped them quadruple
shareholder value creation.
Sean Brown: What about execution? How is
that different when pursuing transformation
through M&A?
Chris Hagedorn: The goal is to establish an
empowered execution engine that enables a large
cross-section of leaders in the organization to step
up and own business cases and results, so you can
run faster by having many more individuals owning
and driving. There are two key elements to this: a
disciplined operating cadence and executive score
cards. That sounds sensible, but what we’re
proposing is a different level of execution rigor. By
“disciplined operating cadence,” we mean investing
a significant amount of leadership time in the
integration and transformation, a leader who is an
extension of the CEO with the authority to truly
drive high-quality, but rapid, decisions, and shorter,
more focused delivery deadlines. With a shorter
delivery cadence, you are more focused and
execution-oriented. When you combine that with
data-driven performance dialogues with the right
people, meetings, and agendas, you enable faster,
better, decision making and you start clearing
challenges and hurdles faster, getting you to the
next window of opportunity faster.
With executive scorecards, we generate a single
source of truth, rather than multiple versions of
where we are and perspectives on business cases.
When you have that truth for each workstream and
initiative, and it’s validated by finance, you can
compare your actuals to the bottom line. This is
very different from reviewing spreadsheets and
saying, “I think we’re notionally there.”
Then you can talk about how to accelerate even
further. You want to use the transformation to
catalyze still more improvements that further
enhance your speed and magnitude of capture
toward your full potential.
Sean Brown: You mentioned expanding the
discussion beyond top leadership to build deeper
buy-in. How does that work?
Chris Hagedorn: The number-one factor we see is
the percentage of individuals in the organization
who truly own the accountability for driving the
change. By engaging a large cross-section of your
teams, you enable them to build capabilities. The
more rigorous cadence and questioning of what is
possible needs to be carried out through the
organization. You want the speed you can have
during an acquisition and integration to carry over
to the rest of the organization.
The NBA shot clock is a great example of this.
Before the introduction of the shot clock,
professional basketball games were often slow,
with the offense waiting out the game clock.
Once the shot clock required them to shoot
the ball within 24 seconds, the pace of games
picked up dramatically, scoring increased
substantially, and games became much more
exciting. This is what we seek to create with a
transformation office—bring a different cadence
to achieve a different level of execution.
Using M&A as a launchpad for transformation 5
‘The number-one factor we see is the
percentage of individuals in the
organization who truly own the
accountability for driving the change.’
—Chris Hagedorn
Sean Brown: How do you track and celebrate the
overall impact that the transformation is creating,
versus just taking note of specific milestones?
Chris Hagedorn: There are the nonmonetary pats
on the back and celebrations that are critically
important to motivating and creating the right
culture. It’s also sharing the progress transparently
of how we’re doing on both nonfinancial and
financial goals. People need to understand where
they are so they can adjust. Those often are just as
important as individual incentives, especially for
leaders and initiative owners who are driving the
impact. If they win, we all win together.
Alex Liu: To be clear, tracking and celebrating
is woven into every part of how work is done.
Every transformation office meeting starts with
recognition—“here’s who’s making it happen on
the transformation.”
Sean Brown: How do you sustain the transformation?
Alex Liu: In many transactions, you do one-time
projects where you get the synergies and then you
go back to base business. The way around that
problem is through building foundational
capabilities, and there are two real aspects to
those. The first is a transformational leadership set
of capabilities, which includes problem solving,
prioritization, having hard dialogues, adaptability,
and role modeling, for example. That might sound
basic, but the point is that you need a common
language and a common set of capabilities across
the entire enterprise, so that everyone is operating
from that base level. The second aspect of those
foundational skills is the functional capabilities that
you need. For example, to reach the higher
procurement savings you’re looking for, you’ve got
to build cleansheet models, etcetera. And of these
aspects, foundational capabilities are critical.
Sean Brown: How have you seen companies put
this into action?
Alex Liu: A global leader in packaging tackled
capability building and the talent by launching a
standard package of excellence that focused both
on performance and organizational health. All 250
Using M&A as a launchpad for transformation 6
‘Investing in capabilities and talent will
ensure that the changes that you’re
making during a transaction are
really sustainable.’
—Alex Liu
of their transformation leaders received a
standard curriculum around problem solving,
decision making, and having tough dialogues, and
they simultaneously rolled out an advanced
capability building program on operations and
commercial processes, etcetera. They also went
through a process of top rating talent in the
organization and changed out 50 of their top 100
roles, and realigned incentives to sustaining the
transformation. In doing so, they increased their
organizational health index scores from the
bottom quartile to the second quartile in just two
years, which is pretty remarkable. Really investing
in capabilities and talent will ensure that the
changes that you’re making during a transaction
are really sustainable.
Sean Brown: We’ve done a lot of research on
the benefits of programmatic M&A, which is an
approach of executing a large number of deals
where the accumulation of the deals drives major
change along a strategy or theme. Do you think a
programmatic approach to M&A can also be an
opportunity for transformation?
Chris Hagedorn is a senior partner in McKinsey’s St. Louis office, and Alex Liu is a partner in the Minneapolis office. Sean
Brown is global director of communications for the Strategy & Corporate Finance Practice and is based in the Boston office.
Copyright © 2024 McKinsey & Company. All rights reserved.
Alex Liu: Programmatic M&A is really a companion
to thinking about a transformational transaction,
and it gives acquirers better odds of success when
doing a transformational transaction. The reason is
that they have built the muscle for it. Even if you’re
a programmatic acquirer, doing a large-scale
transformational deal requires slightly different
skills given the size and scale—they require a
different enterprise-wide view and capabilities.
Sean Brown: What key points should readers take
to their teams tomorrow from this conversation?
Alex Liu: The cycle of M&A has been very
predictable in the past decade, and we’re coming
off a quieter period, so we think 2024 is going
to be a big year for M&A. We would encourage
leaders to prepare for that.
Chris Hagedorn: I would encourage everyone to
shoot for a high aspiration, identify full potential,
and think about the renewal of what the combined
enterprise can actually look like and be super
creative in that up front. Invest the time on that.
Using M&A as a launchpad for transformation 7