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Quick Cash Generation and Speed Are What Make Mergers with Troubled Companies Work—and Can Lead to Greater Rewards

November 19, 2018

About 40% of Big-Company Mergers Require a Turnaround; Risks are Big, but Rewards Can be Greater, According to BCG TURN Report That Brings to Life Eight Successes

BOSTON, Nov. 19, 2018 (GLOBE NEWSWIRE) -- The mergers of Groupe PSA and Opel, Sanofi and Genzyme, and Office Depot and OfficeMax show that speed and fast cash generation are paramount in making mergers with troubled companies succeed—and paying big returns, even in the current M&A environment, with valuations at record levels.

This insight is meaningful, as about 40% of big-company mergers require some kind of turnaround, according to Lessons from Eight Successful M&A Turnarounds, a report from BCG TURN, Boston Consulting Group’s (BCG’s) rapid performance acceleration and turnaround unit. It explores large deals in which the target was at least half the size of the buyer in revenue and the target’s profitability lagged its industry by at least 30%.

“Deals in which a turnaround is a must for success are a category of mergers that deserve more attention. They have much greater variation in outcomes and the risks are greater, but the potential returns can be greater, too,” said Lars Fæste, global leader of BCG TURN and a report coauthor. With M&A valuations at record levels and companies paying top prices for deals, the focus for these deals require is especially important.

Ib Löfgrén, another coauthor and BCG TURN partner, added, “M&A is tough, but it’s tougher when it involves an underperforming asset that needs a turnaround. However, there are some common factors that can increase the odds of success.”

Löfgrén said that some of the musts of turnaround M&A deals that often get neglected are: the acquirer funding the turnaround through “quick wins” that deliver cash to the bottom line, including reducing costs and increasing efficiency of operations quickly; pivoting from cost-cutting to growth measures so there are medium-term wins; and focusing, when appropriate, on upgrading processes with AI and investing in R&D to ensure long-term growth.

More broadly, the report concludes that successful turnaround M&A deals involve the following:

-- A “full potential” approach: the buyer generates improvements to the target company, captures all synergies, and makes needed upgrades to the acquirer, rather than simply integrating the target company’s most obvious synergies. -- A structured and holistic approach to value creation: beyond quick wins, cost cutting, and medium-term growth, successful acquirers look to revamp the portfolio of some business units and buy others that align with strategic direction. They invest in the future. -- Rigor and speed throughout the whole process. “Successful acquirers begin developing plans long before the deal closes to begin implementation on day one, seamlessly combining post-merger integration and a turnaround program. They regard speed as their friend,” said Fæste. -- Addressing culture upfront: they reorient the organization around collaboration, accountability, and bottom-line value.

The stories of the following value-creating turnaround mergers illustrate these approaches in action:

-- Groupe PSA and Opel. Groupe PSA, parent of Peugoet, Citroen, Vauxhall Motors, and DS Automobiles, had been languishing since the financial crisis. After selling a part of itself to China’s Dongfeng and another to the French government, it used the capital to launch a turnaround plan that included, in 2017, buying the Opel brand, which had lost $19 billion since 1999, from General Motors. PSA immediately began reducing the variety of models available, offering more attractive leases and being cautious about offering discounts. The turnaround continued at a relentless pace through the first half of 2018, with profitability restored at Opel and margins rising for Groupe PSA. Overall, gross margins have increased by 35% since 2013; the company has gone from losing money to an EBIT margin of 6%, and market cap has increased more than 700%. -- Sanofi and Genzyme.French pharmaceutical company Sanofi went into acquisition mode in 2009 as it saw its products losing patent protection and recognized that it needed to shift to biologics from traditional drugs. Genzyme, based in the US, was a target. It had grown rapidly but was in trouble: manufacturing problems had halted production at two facilities and led to a shortage of drugs in the company’s portfolio, which made sales plunge. There were also fines from the US Food and Drug Administration. Sanofi moved fast. It streamlined manufacturing, opened a new plant to reduce shortages, simplified operations, and moved sales and marketing for some Genzyme businesses under the Sanofi brand. It integrated Genzyme’s R&D pipeline with Sanofi’s and began a new, rigorous portfolio review process. Not only did these moves restore revenue growth by 2011, they also positioned Sanofi as a global leader in rare-disease therapeutics and made it a dominant player in biologics. -- Office Depot and OfficeMax.Both companies were in a similar situation about five years ago. Online retailers were threatening their business. They agreed on a merger with the goal of generating synergies by reducing the cost of goods sold, consolidating support functions, and eliminating redundancies. Management was able to pinpoint specific goals and opportunities and begin planning integration during the six months before the close. In the process, it created a dedicated integration management office. That meant the two organizations could start integration on day one. In the first year, the company captured cost savings close to three times the original target, and the merger overall unlocked about $700 million.

Other successful turnaround mergers that the report explores are Coope Norge and ICA Norway (retail grocery); Charter Communications, Time Warner Cable, and Bright House Networks (media); Konecranes and MHPS (industrial equipment), and Myer Werft and Turku Shipyard (shipbuilding).

“What should not be lost when assessing successful turnaround mergers—which are hard but carry significant opportunity—is that the most adept acquirers not only focus on speed, early wins, and a strong plan, but also address culture upfront and make sure the organization is oriented around collaboration and accountability,” said Löfgrén.

A copy of the report can be downloaded here.

To arrange an interview with one of the authors, please contact Eric Gregoireat +1 617 850 3783 or gregoire.eric@bcg.com.

About Boston Consulting GroupBoston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with offices in more than 90 cities in 50 countries. For more information, please visit bcg.com.

About BCG TURNBCG TURN is a special transformation and turnaround unit of Boston Consulting Group that works with business leaders to deliver rapid, sustainable, and visible performance improvements, while strengthening their organizations and positioning them to win in the years ahead. By collaborating shoulder to shoulder with the client and being a true performance partner, BCG TURN achieves change that lasts. Team members include BCG TURN experts such as former CEOs, C-suite leaders, and other highly experienced professionals. BCG TURN is fully integrated into BCG and fully leverages the breadth of BCG expertise, networks, data, and tools. For more information about BCG TURN and the BCG TURN approach, please visit us here.

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