A recovering economic environment, changing customer buying patterns, disruptive technologies and regulatory pressures have contributed to the complexity of the current business climate. Dealing effectively with these challenges may require an organization’s leaders to examine underlying processes, stakeholder engagement or their business model in the early stages of transformation.
A recent KPMG LLP survey1 of executives from more than 900 U.S.-based multinational corporations found that 93% are in some stage of business transformation. The survey also estimates that companies will invest up to $30 billion on transformation in the coming years.
Transforming, however, isn’t as easy as making financial investments. It’s a continuous improvement process that requires ongoing refinement to adjust to the constantly changing marketplace dynamics. While most companies get the vision right, more than half of the companies surveyed by KPMG fail to achieve the desired business result, and just 45% have the necessary processes in place to prioritize and implement transformation initiatives within their organizations, including an M&A strategy.
A well-developed acquisition plan is a key component to an organization’s growth trajectory. As the economy has rebounded since the financial crisis, companies have become increasingly comfortable pursuing M&A deals, with the current economic environment demonstrating a remarkable resilience in terms of higher corporate profits, a robust equities market and improving consumer confidence. This business climate, combined with consistently low interest rates, sets an attractive stage for active acquirers, with a recent KPMG2 survey of more than 400 CEOs revealing they will increasingly pursue M&A as part of their overall growth strategy through 2017.
Given today’s relatively low GDP growth rates, companies are achieving desired outcomes by formulating an active and dynamic M&A strategy to complement inorganic growth tactics. By identifying characteristics of the most appropriate targets that fit their business models in advance, organizations are in a position to act quickly when companies with complementary services or products, or located in geographically strategic regions become available.
In keeping with today’s business climate, KPMG has been actively developing its own long-term growth strategy, integrating M&A as an essential tactic. Over the last 12 months, the firm has actively pursued a number of acquisitions and business partnerships that have added new talent, tools and resources. Each closed deal has provided enhanced revenue options and client services for priority areas such as industrial manufacturing, technology and financial services in support of the firm’s continued pursuit of reaching broader strategic goals.
Changing Manufacturing Landscape
As the competitive landscape becomes increasingly more intense and the challenges more complex, many organizations, especially in the manufacturing sector, are recognizing the need to significantly enhance their ability to measure and manage revenue, cost and profit.
According to KPMG’s 2014 Global Manufacturing Outlook,3 growth tops the agenda for manufacturers across all sectors and geographies, yet few think they are effective at determining the profitability of their existing product lines. Focusing on better aligning their cost and revenue data will help drive decision making and enhance profitability.
Having foresight about the changing manufacturing landscape, KPMG acquired BBK, a leading operational and financial restructuring advisory firm based in Michigan. The acquisition is not only aligned with KPMG’s growth plans, but also enhances the firm’s capacity to assist clients in navigating financial and operational challenges that continue to grow in scope, urgency and complexity. The deal also enhances KPMG’s ability to deliver the integrated, wide-range supply chain solutions that organizations need in today’s marketplace.
Founded in 1977, BBK developed a long-standing, positive reputation for providing distressed, operational and financial consulting services, especially for original equipment manufacturers (OEMs) in the industrial manufacturing sector. BBK guided clients through operational improvements and financial restructurings with a strong background in supply chain, supplier risk management and production processes, and offered customized services for each client’s unique requirements in areas including Six Sigma quality, lean manufacturing, profit and loss savings, and strategic initiatives and planning.
Additionally, BBK diversified its service offerings over the past several years to provide innovative solutions to a broad base of manufacturing clients worldwide, including the integration of data analytics to its approach for helping organizations define and address business issues. KPMG found that the use of finely tuned, sophisticated data toolsets in other service areas were able to track financial performance, while asking the most critical strategic questions — making BBK an attractive target. Though many organizations may have effective data analytics tools, few are able to put the information to good use, and conduct an analysis that supports the most complex business issues.
After conducting extensive due diligence, it became clear that BBK would be a valuable addition. Its personnel, capabilities and specialization would complement KPMG’s services and teams, allowing the merged groups to better serve clients in the automotive and industrial manufacturing sectors and drive their performance, spur growth and increase profitability, while mitigating risk.
This acquisition positioned KPMG at the forefront of the ever-evolving restructuring landscape. By merging BBK’s manufacturing knowledge with the firm’s global network, the integrated entities can bring clients financial and operational services that will help inspire greater confidence among clients’ stakeholders, improve overall performance and alleviate risks. Bringing BBK to KPMG also augments the firm’s broad approach to due diligence, M&A, sales and divestitures, buyouts, restructuring, bankruptcies and other uncertain financial conditions.
A convergence of technologies and business opportunity is producing a flood of revenue in cloud, mobile, and data & analytics (D&A). These technologies are strategically enabling new business models, and in virtually all sectors of the global economy, companies are leveraging technology to drive innovation and transform businesses.
D&A is helping companies anticipate customers’ needs and increase operational efficiencies. Many companies are planning to invest in D&A to mine for actionable insights and to reinvent business models that will be competitive differentiators. The shifts towards D&A, mobile and digital business models are influencing M&A strategy decisions to drive speed to market by obtaining assets that create a competitive edge for organizations.
KPMG has been considering companies that can provide the most advanced and innovative technology services to clients. In March, KPMG acquired Cynergy Systems, a mobility services business and leading digital experience company specializing in strategy, design and development across mobile, web and desktop. Cynergy allows KPMG to give clients who are focused on transforming their business processes and customer engagements a huge advantage through digital and mobile technologies.
Earlier in 2014, KPMG also purchased Link Analytics, an analytical solutions company, advancing its D&A capabilities to help clients accelerate growth, improve customer loyalty and drive operational performance. By offering advanced D&A capabilities to clients, they are able to integrate complex data into business solutions, and move with speed, flexibility and innovation.
Deepening Financial Services
The Dodd-Frank Act has produced provisions that more strictly regulate the securitization market, and under Basel III, banks are required to increase capital and liquidity. With these regulatory rules aimed at banking institutions and the limited ability of these institutions to finance deals, mid-market organizations have begun to explore alternative sources of capital to support their growth agendas in order to capitalize on renewed M&A optimism and appetite.
In June, the acquisition of substantially all the assets of St. Charles Capital was announced by KPMG’s wholly owned subsidiary KPMG Corporate Finance LLC (KPMG CF). A highly respected boutique investment bank, St. Charles provided M&A and capital advisory services for middle market companies. KPMG CF pursued St. Charles to enhance its investment banking capabilities for middle market companies in the technology, telecommunications, financial services, energy and industrial manufacturing sectors, and to expand geographically. Combining the capabilities of the KPMG global platform with St. Charles’s middle market, sector-specific specialization generates a valuable resource for middle market organizations pursuing deals while managing the impact of regulatory changes.
In the current economic climate, the hedge fund industry is rapidly growing, and the way capital is raised and deployed has also been shifting in this sector. Following the acquisition of St. Charles, the firm announced its largest transaction since the inception of KPMG in 1987. Rothstein Kass had been established as one of the country’s leading providers of accounting, auditing, advisory and tax services to the hedge fund industry, and serves as a natural extension of KPMG’s alternative investments practice. With new regulations, increasing market complexity and global convergence saturating the alternative investment sector, Rothstein Kass’ pool of talent enhances KPMG’s ability to assist hedge funds of every size and at every stage of growth, including both new and established funds.
In today’s dynamic economic environment, the challenges businesses encounter as they explore sustainable growth options are continuously changing. Specific industries are also evolving, causing organizations to reexamine underlying business processes and integrate additional approaches to growth.
Organizations can consider M&A as a valuable strategic growth component to transform their businesses. In addition to pursuing organic growth tactics and eyeing targets that bring new talent, tools and resources offer great opportunity for organizations to gain market share, increase revenue and stay ahead of the competition. KPMG is also pursuing disciplined transactions to remain in sync with the global, competitive landscape, and is positioning itself to solve the most complex business problems and better assist organizations with achieving transformational goals. Looking ahead, it’s anticipated that organizations will continue to capitalize on the improving fundamentals of the global economy, with M&A serving as a sound component to their transformation strategies.
Phil Isom is KPMG’s head of U.S. Corporate Finance & Restructuring. Isom has more than 20 years of investment banking, advisory, finance, investing, valuation, bankruptcy, turnaround and operational experience. He can be contacted at pisom [at] kpmg [dot] com.
Dan Tiemann is KPMG’s Americas lead for Transactions & Restructuring. Tiemann has extensive experience in mergers and acquisitions, and served as a financial consultant to numerous investors and lenders on more than 400 leveraged transactions. He can be contacted at dantiemann [at] kpmg [dot] com.
1. Business Transformation and the Corporate Agenda, KPMG, 2013↩
2. Setting the course for growth: CEO Perspectives, KPMG, 2014↩
3. Global Manufacturing Outlook: Performance in the Crosshairs, KPMG, 2014↩