Corporate transformation: How to future-proof your company
Report by Noerr and the Technical University of Munich (TUM)
Corporate acquisitions are the most important means of transformation. That was the finding of a report by the law firm Noerr and the Technical University of Munich (TUM). The primary focus of these acquisitions was revenue growth through product innovation and digitalisation.
Our scientific survey was based on 21 extensive interviews with 21 senior executives from a variety of industries in order to examine the key issues relating to corporate transformation.
Nearly all respondents named the three most important current drivers of corporate transformation to be technological change, satisfying stakeholder expectations, and business model changes. As transformation drivers which will play an increasingly significant role in future, respondents mentioned ESG, sustainability, digitalisation and the war for talent. “We can see that alongside revenue growth, soft factors are becoming more important, as companies must remain attractive to talent and ‘investable’ for investors,” says Natalie Daghles, partner and joint head of Mergers & Acquisitions at Noerr.
Almost half of the respondents stated that the impetus for corporate transformation came primarily from the management. Some companies created a position on their board for a “Chief Transformation Officer” to drive transformation at management level.
M&A is the means of choice for corporation transformation
The most important means for corporate transformation were corporate acquisitions. Acquisitions of companies essentially serve as catalysts for transformation and represent a quicker and more effective means of driving transformation than in-house development. For example, business models were purchased that were “not yet known or with which no experience had been gathered”, says Isabell Welpe of TUM. “It is only in later phases of a transformation that the focus shifts to organic growth and development from within the group.”
A large proportion of the respondents also mentioned selling business units and establishing joint ventures, platforms and cooperations as different means of transformation which would allow them to gain access to know-how, talent, product innovations and new technologies, and also to open up new markets.
For most respondents, a central motive for a corporate acquisition is to take over know-how (which is known as “competence insourcing”). Other motives given for acquisitions related to extending existing technology, expanding product portfolios and product and technology innovations, and developing new products.
Another motive that was expressed was the wish to protect themselves against disruption, especially by obtaining expertise in the digital field, adapting to technical requirements or market conditions and accessing new business models. However, tax and liability issues, legal consequences and co-determination play only a subordinate role or no role at all in the case of corporate transformations.
Access to innovations
After identifying corporate acquisitions as the most important means for corporate transformation in the interviews, we performed quantitative analysis of the transaction data from the last few years to examine the transformative motives and industry-specific features of corporate acquisitions in Germany. On the basis of a sample of 500 transactions between 2016 and 2020 from the Mergermarket data set (pre-pandemic), we analysed the strategies of the acquiring companies.
According to the analysis, just over a quarter (27%) of all corporate acquisitions in the survey period could be characterised as having a transformative background. On the other hand, a total of almost three quarters could be assigned non-transformative motives. “We can see a trend towards more transformation-driven corporate acquisitions in the current market environment,” says Noerr partner Gerald Reger.
The main strategy of German companies in corporate acquisitions was to increase revenues by accessing product portfolios (35%). It was noticeable that this strategy was most frequently pursued in the energy sector (62%).
The second most common strategy (19%) was to increase revenues by entering the target’s geographical home market. This strategy was mainly used in the utilities sector (40%) and in the computer (hardware) sector (40%). Thus, the two most common strategies pursued in corporate acquisitions are not transformative.
The third most common strategy (17%) was to grow revenue by obtaining innovative solutions and products from the target company. This strategy was pursued especially frequently in industry (electronics, 33%). Thus, the third most common motive for corporate acquisitions is the pursuit of a transformative strategy.