According to Gartner, 91% of organizations are now engaged in some form of digital initiative, with 87% of senior business leaders saying it's a priority. But digital transformation isn't the only way modern businesses are evolving.
The practice of "transformational acquisitions" has been around for as long as mergers & acquisitions have existed, though the term itself is relatively new. And according to a recent survey from PwC, nearly half of the acquisitions in 2022 were classified as transformational.
So what does "transformational acquisition" mean, and what kinds of acquisitions does it entail? To help private equity and corporate development professionals understand the practice, we'll first provide a transformational acquisition definition, and then dig into some benefits, challenges, and examples.
The transformational acquisition definition is "a deal that uses a merger as a catalyst for change to create an entirely new or much larger company." The goal of transformational acquisitions is to enact long-term, fundamental changes to both companies involved.
While add-on acquisitions are popular methods of augmenting an existing company with the products or services from the acquired company, transformational acquisitions are much more revolutionary. At the end of an add-on acquisition, the acquired company is usually absorbed or remains separate from the acquirer.
In a transformational acquisition, however, the resulting company often operates under a new name and/or with a new business strategy and purpose. Leadership may be entirely different and composed of members from the original companies' executive teams, wholly new, or a mix of both. Processes and internal structure may have changed. Essentially, transformational acquisition spurs a massive, disruptive paradigm shift that alters the face of both companies involved.
Transformational mergers & acquisitions give the companies involved the unprecedented opportunity to do more than would otherwise be possible individually, and provide many benefits. These can come in the form of entering a new market or reducing competition by becoming the default leader due to a merged company's increased size and offerings.
Accessing new intellectual property (IP) or merging existing IP that the acquirer or newfound company can further develop is also a major benefit of many transformational acquisitions. All these benefits, however, lead to one thing: accelerated growth, which usually results in true disruption and far-reaching effects within a given industry.
Amidst all its benefits, transformational acquisition is rife with challenges and should not be undertaken lightly. For instance, transformational deals often take years to complete. Because the businesses involved could be operating under new leadership, with new products & services, and using new processes, successful transformational mergers & acquisitions take much more effort than traditional M&A.
While it should be a priority to focus on synergizing and reducing costs, because of the nature of this type of integration, it must be done with care. Both companies in the deal will have HR and Finance departments, for instance, each with their own people, processes, and procedures. To get to the optimal outcome, the teams must have an open conversation and determine the personnel, processes, vendors, etc. that make the most sense given the company's new focus.
Good communication is paramount with transformational acquisitions. This is especially true if the acquired business is outside the acquirer's usual expertise or existing portfolio.
Considerable research must be done in advance to gain deep sector knowledge, regardless if the acquirer already has a foothold in the industry. Utilizing deal sourcing software and other research tools, as well as bringing on the right personnel to gain the necessary knowledge, will make or break the transformation.
Remember, change in and of itself is difficult, and with transformational acquisition, change is the goal. Traditional M&A often has issues integrating two companies, and since transformational acquisition is far more complicated, the amount of work involved should not be underestimated. That said, the result of a transformational acquisition is far beyond what's possible with traditional M&A.
To better understand what a transformational acquisition looks like, here are a few examples of transformational mergers and acquisitions.
In 2019, The Walt Disney Company acquired several departments of 21st Century Fox, including the motion picture, cable entertainment, and direct broadcast satellite divisions, from Fox Corporation for $71 billion. With the acquisition, Disney gained many film assets, including rights to some of the Marvel IP to which they did not previously have access, and the increased ownership has allowed the company to compete better against other streaming services. Fox was able to reduce the complexity of its business, and the capital received helped it re-platform its core technologies and operations. This transformational acquisition freed Fox to focus on its core business and, in return, gave Disney what it needed to get ahead of its competition.
One of the world's leading pharmaceutical companies, Novartis, didn't exist before 1996. Instead, the $30 billion transformational merger of Ciba-Geigy and Sandoz created the new Switzerland-based company. With the merger, Novartis revolutionized both companies' overall visions, strategies, structures, and operations, establishing an entirely new company with a renewed focus and direction as a combined team.
In 2008, Apple bought computer chip designer, P.A. Semi, and with it, transformed their business. Prior to this, Apple purchased its CPUs (computer processing units, the "brain" of computers) from manufacturers such as Intel. The acquisition of P.A. Semi gave Apple more control over chip production, allowing them to design and produce exactly the chips they needed to sustain their price premium and better compete with other computer and mobile device manufacturers.
Another example of a transformational acquisition in the same vein as Novartis is Leidos's acquisition of Lockheed Martin's Information Systems & Global Solutions (IS&GS) division in August 2016. Leidos is now twice the size of their largest competitor at $10 billion in revenue, effectively dominating their market thanks to the acquisition. With the reduced complexity of their business after selling their IS&GS division, Lockheed was able to focus on the aerospace industry, making it transformational for both parties.
Transformational acquisitions, while challenging to pull off, can be incredibly worthwhile for both the companies involved as well as any private equity firm that may assist with the deal. Finding and setting up this type of transaction requires significant research. While having accurate, fresh data is beneficial for any deal, it's especially crucial if your firm aims to complete a transformational acquisition.
For firms looking for their next investment opportunity, whether it be "transformational" or traditional M&A, a deal sourcing platform like Sourcescrub can help. Request a demo to see for yourself.