CFOs can construct a game plan for building resilient business models, accelerating transformation, and capturing market leadership

As companies move toward a post-pandemic world, thriving in such an environment will require leaders to reimagine the future of their markets, reexamine core capabilities, and reevaluate competitive advantages—all at the same time. At a more detailed level, long-term value creation will require leaders to take a stand on such moving targets as accelerating digitization, constant shifts in technology, talent needs, evolving customer appetites, and energy transition.

Meeting these strategic needs has clear implications for M&A growth planning and priority-setting, and CFOs and their finance functions are critical to their success across multiple phases of a transaction. To help manage their actions, CFOs can apply the Four Faces of the CFO, organizing their roles and actions across the Catalyst, Strategist, Steward, and Operator roles.In their roles as Steward and Strategist of the business, for example, CFOs are required to manage M&A processes to build resilient foundations that can weather any storm—including astute management of cash reserves and selective debt or alternative debt funding for strategic deals. Another focus of these roles is ensuring that recently completed deals create value for shareholders and influencing strategic deal making to bolster business model resilience in areas such as pricing strategies, cost management, and supply chain. They also need to work with others in the C-suite and the board to initiate portfolio reviews to identify value leakages in the business and, when those occur, lead an active divestment program to secure the best value for non-core assets.   As Catalysts of change, CFOs need to proactively coordinate the process of exploring alternative, inorganic deal structures such as alliances and joint ventures, as well as offense-driven M&A plays to create the business of the future. These can include portfolio-expansion investments in disruptive innovation, cross-sector convergence, and other deals based on gaps and opportunities in the business. A well-managed set of defensive and offensive deal archetypes are required to build resilient business models, accelerate transformation, unlock the potential of ecosystem alliances, and capture market leadership. Redefining M&A strategies in terms of these choices can bring much needed clarity of purpose while paving the path to success.

One of the lessons from the COVID-19 pandemic is that all companies, large or small, need to define and build resilience firmly at the heart of their business model and organizational culture. Doing so can help ensure the organization is agile and adaptable, able to ward off threats from the marketplace, and prepared to deal with complex and unpredictable events. Consider the following defensive actions to support resiliency:

• Accelerate synergy realization and deliver value. In 2021, shareholders approved nearly $5 trillion worth of deals.1 Now the dealmakers involved can expect significant investor pressure to accelerate synergy realization and deliver value.

Most integration programs follow a consistent pattern of three phases: integrate to close, establish an interim operating state while investing for the future, and deliver the realization of the business case. A fundamental problem is that such programs typically never go beyond an interim state due to changes in market conditions, insufficient management attention, and a business-as-usual mentality. The longer post-close execution takes, the less likely management will be able to deliver promised returns. Sophisticated acquirers transform as they transact, to accelerate the time-to-value of business case realization. Leveraging tools such as predictive analytics, robotic process automation, and digital platforms, and moving key processes to the cloud can help capture cost and revenue synergies while creating value far beyond the sum of a merger’s parts.Additionally, our experience tells to estimate that tax synergies regularly represent more than 20% of available deal gains. Significant benefits can be found in tax alignment in the value chain—including among suppliers—and through improved operating footprints and integration strategies. Approaches such as capturing local tax credits and shifting some software to the cloud can contribute to the self-funding of digital transformations.

• Strengthen the portfolio. Many companies are facing pressure from activist hedge funds looking for portfolio restructuring, from regulators pressing for asset carve-outs as a condition for merger approval, and from their own boards, which are keen to ensure companies remain on track with sustainability and net-zero commitments.“Sophisticated acquirers transform as they transact, to accelerate the time-to-value of business case realization.”The 2022 Deloitte Global Divestiture survey found that seven in ten companies are considering making two or more divestments in the next two years as they continue to focus on building resilience. The survey also shows that four in ten businesses are already selling carved-out assets at higher-than-expected prices, in part due to increased demand from private equity buyers.Becoming a prepared seller is more important than ever. There are indications that a considerable number of recent corporate divestitures have required more effort than the seller might hope. The one-time cost of preparing to shed a business is rising: 75% of respondents to a recent global divestiture survey say the cost of a divestiture was 4% to 7% of the revenue of the asset sold, while just 17% say the cost was 3% or less. In our 2020 survey, by sharp contrast, most respondents indicated the one-time cost was less than 3% of revenue. 

In addition, many companies are identifying problematic assets to divest by reexamining their existing business through an environmental, social, and governance (ESG) lens.Potential buyers are increasingly sensitive to risks involving workplace inclusion and diversity, the supply chain, brand perception, and the impact of climate change. Given these shifts, ESG-related diligence and compliance are becoming key components of deal execution and post-deal transformation.

• Explore opportunistic deals to safeguard supply chains and competitive positioning. Global supply chain disruptions are impacting every sector, either directly or indirectly. In addition, changing stakeholder expectations toward ESG are putting pressure on businesses to fundamentally redesign their supply chain infrastructures to improve transparency and reduce their carbon footprint.M&A activities can play a key role in shaping the response. To that end, companies can explore opportunistic deals to safeguard existing supply chains and consider innovative options such as backward or forward integration with suppliers. Companies can also consider strategic acquisitions of suppliers to maintain competitive positioning in the market and consolidation to firm up competitive positioning.Co-investment and partnerships with suppliers or even private equity firms is another consideration, the better to pool capital and expertise toward investing in value-enhancing opportunities.

Bold moves involving transformative acquisitions, ecosystem alliances, and disruptive investments will be required to charge the growth engine and lay the groundwork for capturing market leadership. Companies can play offense to gain momentum with the following steps:

1. Capture the digital future. The pandemic’s conditions ruthlessly exposed companies that lagged in digital investment, omnichannel capabilities, and agile operating models. At the same time, they enabled new market opportunities for companies that were digitally prepared.In a CEO survey by Fortune magazine and Deloitte, nearly two out of three executives indicated digital was their No. 1 transformation priority. Such change is an enterprise-wide long-term commitment that cuts across business departments and technologies. Some companies will actively seek alliances and partnerships for these efforts, while others will acquire technologies and capabilities to accelerate their transition.
2. Identify portfolio gaps and expand the value chain. Corporations need to regularly reevaluate their sources of competitive advantage, identify portfolio gaps, and consider opportunities for expansion. In a survey of CFOs by Deloitte, opportunistic deals to fill gaps in product and service portfolios were rated the top M&A priority. Establishing a pipeline of deals can expand a company’s value chain and make it easier to capitalize on adjacent market spaces. Companies may also want to explore platform business models to expand and unlock the value of their customers and networks.
3. Deliver returns with purpose. Businesses are increasingly expected to demonstrate they can deliver returns with purpose and create value not only for their shareholders but also for employees, customers, suppliers, and societies where they operate. In turn, many companies are aligning their investment strategies with the United Nation’s Sustainable Development Goals, a universally accepted framework for measuring progress against ESG goals. Impact investing is fast becoming a dedicated M&A strategy, and in 2021 around $188 billion was spent by corporations on acquiring relevant assets, the highest figure on record.2Investing in ESG pathways requires companies to adopt a multidimensional M&A approach. That could involve product plays though investments in businesses whose core product and services drive ESG improvement; infrastructure plays, with investments in companies that provide the underlying infrastructure for sustainable solutions; and technology plays through investments in enterprises that use disruptive technologies to displace the market by creating new product categories.
4. Collaborate for competitive advantage. One of the enduring legacies of the pandemic is how corporates embraced collaboration, forming the bedrock of global recovery. The post-pandemic transition will continue to bring significant challenges, such as supply chain disruptions, skills shortages, climate change complexities, and cross-sector convergence, that cannot be solved unilaterally.These dynamics have necessitated expanding the scope of traditional M&A strategies to include collaborative structures such as ecosystem alliances, partnerships, and other similar constructs that coalesce around common purpose and create shared value for the businesses, their clients, and their communities. Every opportunity needs to be considered through the lens of whether to build, buy, or collaborate.Companies should actively reach out to a multiplicity of partners to build such purpose-led alliances and partnerships. This could include allying with a diverse range of collaborators including suppliers, private equity firms, innovative startups, cross-sector specialist peers, or even traditional competitors.
5. Capitalize on cross-sector convergence. The rapid adoptions of exponential technologies, digitization, and shifts in consumer attitudes are blurring traditional sector boundaries, leading to a convergence of business models across seemingly disparate sectors. The result has been the further evolution of ecosystems and creation of opportunities for innovators and nontraditional players to disrupt established companies by redefining the basis of competition.This convergence has unleashed a new paradigm of disruptive M&A, with companies spending more than $1 trillion in recent years investing in such assets. Remarkably, the non-technology sector has overtaken the traditional tech sector’s investment into such assets. These deals are inherently linked to long-term transformation and are likely to remain one of the defining features of the M&A marketplace.
6. Scale at the edge of existing markets. Corporate venturing is a springboard to test new technologies, market offerings, and talent that can shape the future of sectors. As ecosystems mature, companies need to develop corporate venturing strategies and aligned capabilities as an integrated approach to innovation-led business transformation. That can give companies the confidence to build a portfolio of investments at the edge of their existing markets and establish strategic positions in transformational growth segments.Ultimately, these defensive and offensive sets of strategies can help companies remain competitive in an uncertain environment likely to present unprecedented challenges.

Click here to read the full report, “Charting new horizons, M&A and the path to thrive.”

 —by Iain Macmillan, managing partner, Global M&A Services leader, Deloitte Touche Tohmatsu Limited; Mark Purowitz, principal, U.S. leader of M&A Strategy and Transformation, Deloitte Consulting LLP; and Sriram Prakash, global leader, M&A Insight & Ideation/Disruptive M&A, Global M&A Services, Deloitte Touche Tohmatsu Limited