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Getting Fit for Mergers and Acquisitions
August, 28th 2017

The company had a history of growing through acquisition. But using rollups to become a leading player in a fast-growing niche of services and technology had saddled the company with a complex organizational structure and significant inefficiencies.

Now, as it prepared for its biggest acquisition ever — that of a global company that would increase its size by a third — the company decided to take a comprehensive look at its costs, operating model, and organization. Over the course of a year, the company analyzed all of its major selling, general, and administrative (SG&A) functions and processes and set about reinventing them. The result: By the time the acquisition was complete, the company was much better organized and had an operating model that would allow it to efficiently absorb the new acquisition — and help the whole enterprise run better.

In preparing for this transformative acquisition, the company used an approach we call Fit for Growth.* This powerful discipline, which is described in detail in the book Fit for Growth: Strategic Cost Cutting, Restructuring, and Renewal (by Vinay Couto, John Plansky, and Deniz Caglar; Wiley, 2017), rests on three pillars. First, companies that are fit for growth focus on a few differentiating capabilities that lie at the heart of their competitive advantage. Companies identify those capabilities that are unique to the company and lie at the heart of its identity. Second, they align their cost structures with those capabilities. Recognizing that not all costs are bad, fit-for-growth companies manage their costs tightly and thoughtfully, freeing up funds to further invest in the “good” costs that strengthen a company’s differentiating edge. Third, they organize for growth. Based on their differentiating capabilities, fit-for-growth companies design an operating model that enables and sustains cost reductions and then create the right conditions for managers to drive growth.

Typically, the Fit for Growth approach is used to realign existing resources at established companies with long operating histories. But the approach can also prove to be a powerful lever when companies are reorganizing and changing shape because of a significant merger, acquisition, divestiture, or spin-off.

To understand why the Fit for Growth approach is so valuable in deals (combinations or separations), remember that success in deal making — a high-stakes, expensive undertaking — is never assured. Our own research shows that successful deals tend to fit with or enhance acquirers’ core capabilities systems (see “Deals That Win” and “The Capabilities Premium in M&A”). Deals that don’t have such a capabilities fit usually fail to create shareholder value. At the same time, it is clear that companies are putting more at stake when they undertake transactions. There has been a resurgence in the number of transformational deals, as companies set out to expand their market reach, broaden their product portfolios, and add significantly to their technical resources and management talent. In a 2017 PwC survey, 54 percent of respondents said that their company’s biggest deal in the last three years had been “transformational,” up sharply from 29 percent in 2010.

Amid the pressure to eliminate redundancies and find synergies, deal-making teams can easily lose sight of what’s important and of what needs to be preserved. That’s why Fit for Growth has special relevance in deals. It provides a set of guidelines that ensure the deal is being sought for the right reasons, that the right synergies are being pursued in the right ways, and that the new businesses are being stood up the right way — across all phases of M&A or separation.

 
 
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