321. M&A integration: PE’s new value creation playbook

0:01Matthew Maloney: For McKinsey & Company, I'm Sean Brown and welcome to Inside the Strategy Room. Private equity is increasingly using M &A integration as a powerful value creation lever in today's lower multiple, longer hold environment. But integrations are notoriously difficult to get right. To explore three high-impact integration strategies that leading sponsors are using, we're joined by Matt Maloney and Brian Dinneen. Matt is a partner in our New York office, a leader in our private capital practice, and global co-leader of our CFO practice. And Brian is a senior expert in our Boston office who helps clients on integrations, separations, and mergers.

0:41Matthew Maloney: Welcome to you both.

0:43Brian Dinneen: Thank you, Sean. It's great to be here today.

0:45Matthew Maloney: Thanks, Sean. Matt, to start off, M &A is not new for private equity portfolio companies. It's been a part of the PE toolkit for a pretty long time. So what's different in today's environment that warrants this conversation? Yeah, it's true, Sean. M &A is not a new tool in the toolkit by any means, but rather now more than ever, it's even more important that folks are extracting the maximum value to build not only the company that they're hoping to, but to not necessarily add complexity and cost, which oftentimes happens when not done well. So it's not just about sourcing and finding the deal, but actually properly integrating and realizing that full potential.

1:25Matthew Maloney: And to also build that as a core capability, right? To not just necessarily do it once, albeit if you do it once, that's great and do it well. But oftentimes that you'll see the rinse and repeat where this becomes a core part of their value creation thesis, right? It's sometimes faster to buy and acquire and integrate than to build from scratch. And the private equity landscape continues to shift, right? So what aspects of that new terrain are reshaping the approach that Portco's and sponsors are taking to value creation and M &A during the hold period. I think everyone is fairly aware of this.

2:02Matthew Maloney: Over the last few years, multiples have sort of declined on average across the regions, making it a little bit more difficult to make the value creation thesis, the end of the hold period, make sense and work. Now there's even more pressure on folks to be able to deliver what is value creation during that limited hold period. included in that is we've seen that hold periods have extended over time. So there is actually time to be able to build and integrate these, right? There's not necessarily the old adage of a two to three year hold period, and then you're already looking for the exit. These are times where now you can actually have proper amount of time to build, integrate, and construct for the future.

2:43Matthew Maloney: And Matt, as these hold times continue to extend, is this correlated with more M &A? And if If so, is this something that's consistent regardless of size of fund? I think it's across the board, Sean. I think the whole period is more just the increased challenge to deliver the thesis in an accelerated time is not there. Our research shows that over the past years, the operational value creation portion of the value creation thesis is becoming bigger and bigger. It's roughly half of what it has been historically. And going forward, we think that could even be more versus in the past, multiple expansion and leverage typically drove a fairly large portion.

3:22Matthew Maloney: So now, you know, it's the heavy lift, both the operating and driving the organic growth of the business itself, but also looking how can I quickly bolt on and scale the business in a platform at play. Thanks. And Brian, anything you'd like to add here?

3:36Brian Dinneen: Yeah, I think, I mean, given the circumstances that Matt laid out there, you know, multiples are down, hold times are up. increasing value coming from operational improvements, those three together really just say, like, this is a ripe time to use M &A as one of those primary value delivery levers, because ultimately, you're going to get more EBITDA, you're going to get more growth. And those are the key levers that M &A can give in integration when done well.

4:07Matthew Maloney: Right. And Matt, within this context, how are private equity firms and their portfolio companies pursuing their M &A strategies? What are some of the common approaches that you're seeing? So what we see is that typically there's three different plays that folks have done. One is the serial acquirer and integrator. This is the 10 plus roll-up acquisitions per year. This is a kind of a constant M &A in motion play. Oftentimes it's done with regional or small local players that you're rolling up into a much larger one. The second one is a merger of nearly equals, right? these are slightly bigger.

4:44Matthew Maloney: You might not do nearly the velocity and the number that you would do in kind of the first lever, but still equally important in there. And then the third, which is emerging more often now than not, is to building new capabilities, either through a joint venture or through an outright acquisition, moving either up or down the value chain or left or right to bolt on and be able to acquire a larger part of the funnel of which your clients and customers of a given portfolio company or looking from a supplier. And so, Brian, how would one's integration strategy and the challenges and goals differ across these archetypes?

5:23Brian Dinneen: These three have very different integration approaches. The first one is really, as Matt mentioned, how do we get the velocity through? How can we rapidly bring the five to 10 companies that we're acquiring a year onto our platform? and how can we do that in an efficient sort of streamlined way? And that tends to be acquiring company led, tends to be like very clear what the destination is. And it's really about mitigating risk and capturing upside while you're bringing people onto the platform. Whereas the second one, because they're more comparably sized, there's actually just inherently more risk and more optionality in what the future state looks like.

6:02Brian Dinneen: This can actually be a catalyst to really say, hey, how can we do this differently? What are the efficiencies that we can do at this new scale that we may not have been able to do independently? And sometimes that requires rewriting processes. Now, this third one is the most challenging because it's not only internal decisions, but it's actually much more about how can we serve the customer in a new and different way and bring these capabilities to bear, which often are quite different. And so it becomes much more around finding the right places to integrate in order to enable those capabilities to really be brought to the customer.

6:42Brian Dinneen: So it tends to involve much more of an external lens while you're proceeding on the integration.

6:49Matthew Maloney: Okay, so each of these options is hopefully going to also help drive accretive growth. But how do you make the decision between M &A and organic growth? If operational value creation becomes more critical, especially with these longer hold times that we've talked about, how do you think about organic versus inorganic?

7:10Brian Dinneen: So I don't think it's a either or. I think it's actually an and because I think that that's actually one of the big unlocks in M &A is if you can use it to accelerate growth in certain areas and that should be complementing your organic engine. And so I think that it's a bit of a false dichotomy to say, are we going to put it in A or B? It's actually you need to have the dual engine really humming. And that's where we see sort of the benefit of being able to quickly move into adjacencies, being able to find new pockets of growth only actually unlocks more organic opportunities. and getting the integration right is actually correlated to how can I keep the organic growth engine moving while I am doing what can be a complex integration.

8:02Matthew Maloney: Thanks. And so we have the three common archetypes now that we've talked about, the serial acquirer or roll-up, a merger of equals or near equals, and then acquiring new capabilities, perhaps in adjacencies, maybe through a JV. So let's talk about how one actually makes them work. And maybe we could bring them to life through some examples. And I thought maybe, Brian, you could start us off with the serial acquirer or roll up. Perfect.

8:29Brian Dinneen: So we're going to go through just some examples of each one of these. I think, you know, first, the insurance brokerage space has for a long time been very fragmented. lots of targets, particularly in the US. There's been a play to PE funded often, roll up these insurance brokers. One example is over a 10-year period, 80 acquisitions. That equals out to about eight deals per year. So lots of deals coming in. The way that you make this work is sort of four key things. One is you have a clear value proposition for the acquired company. Two is that you're actually doing the full integration. You're not just acquiring and accumulating.

9:15Brian Dinneen: You're actually bringing them on to your platform, your ways of working that allows them to actually be more efficient. You're investing in M &A capabilities and you're finding ways to drive performance in that acquired talent. And so just to kind of bring those to life, particularly in insurance brokers, you could think about the business is largely driven by the client-facing producers who are out there every day talking with their clients, bringing them options. And there's a commission structure that is very rewarding for those individuals. And so if you can link them into the platform that allows them to reduce their administrative burden, allows them to free up more capacity to drive new client relationships, and ultimately increase the commission, that there is a clear value proposition here for these independent producers.

10:06Brian Dinneen: The second thing is actually a big piece that is actually fully integrating them in to the backend platforms, the cultures, the ways of working, because that actually enables them to make these changes, to be able to bring new offerings to their clients. It allows them to have that additional time and capacity. And so these are very much linked together. Now, you can't do that integration quickly unless you have the right capabilities to do this.

10:33Matthew Maloney: And so in this insurance brokerage example, what kind of resources were involved in both the deal making as well as the integration effort?

10:42Brian Dinneen: You know, the company had two individuals that were leading M &A, but they certainly weren't doing it alone. This was actually the full company's mandate was to drive this M &A engine. And so the CEO kind of viewed this as a top responsibility of him. Anytime deals got close, he was the one that helped bring it over the line. You also had people in finance and HR and legal and IT that knew the playbook. They, you know, they, it wasn't, you know, 100 % of their day job, but whenever there was an integration and there was almost, you know, always a series of integrations coming in, they would get called in to help, you know, execute the transition from the old ways of working to the new ways of working.

11:23Brian Dinneen: And over time, that capability really built up with the repetition, the practice and the learning and the process. And then finally, the last one was I mentioned, it's really the producers are a really important part of this business. And so having that lens of how do we actually keep them engaged, motivated to go out there and drive growth, this was a very important aspect of it too. Now, with that said, behind every great successful portfolio company is also a PE operating partner often or deal team that can help identify some of these opportunities, make connections and give that coaching and learning and development along the way.

12:07Brian Dinneen: So I think that this is really a long-term success story that really created a lot of value over a 10-year period.

12:15Matthew Maloney: Maybe you can talk a little bit more about that interplay between the funds deal team, the operating partner and the portfolio company. What are they each bringing to the table?

12:26Brian Dinneen: So I think I'll kind of separate the two. I think the deal team, often the sourcing, the deal thesis, the establishment of an M &A strategy, those are all areas where having unique insight about a market, a unique insight about where the value pools sit, those are the bread and butter of a high-functioning deal team. Whereas an operating partner, I think their value add is the coaching and the execution orientation to help with the integration portion of it, really helping make sure that the progress is moving forward, that the gaps and capabilities are being filled. The team has an opportunity to look back, reflect, and institutionalize some of the learnings from the prior deals.

13:11Brian Dinneen: Well, too. So I think that those are their different roles and help with sort of different elements of the deal lifecycle.

13:16Matthew Maloney: And Matt, what would you say about the interplay between these roles? And is it always positive? Yeah, I couldn't agree more. I think they're very complementary roles. I think they can be viewed sometimes as adversarial, but they're really not. The deal team can go out and help to source, structure, and close deals. Obviously, the sourcing can be quite jointly approached because oftentimes the management team has very deep industry knowledge and things from conferences and know-how, as well as then the deal team itself. And so the working together to jointly identify those, you're not going to identify as Brian has on this one in particular, you know, 80 acquisitions in 10 years.

13:54Matthew Maloney: I'm sure it's not 100 % deal team and 100 % management team, but a mixture of both, right? And it is one. I think second thing though, is that, you know, oftentimes where the, you know, aligning on what that value creation thesis is, the integration levers, right? And that playbook that evolves over time, you learn more as you go along and it continues to evolve. But having that as a core competency, not just for a current private capital holder, but for future, right? This is a durable, robust platform that can continue to scale in future acquisitions. So it's not just during that one hold period, but in the future that that's a core competency of both the speed, the low risk and the realization of value very, very quickly is quite attractive.

14:38Matthew Maloney: Again, going back to what some of the momentum of the business and the expansion in multiples. There are plenty of folks that can go out and buy companies and operate in a very federated model that might appear as though it's actually operating as one. It's actual tough, real work to do this in the right way. But again, if you can get that, you get somewhat of a virtuous cycle of where you can find, acquire, integrate, and build very, very quickly and continue to learn. is building 80 plus companies over there. There's plenty to learn from each other and best practice sharing across each one of those.

15:13Matthew Maloney: Great, and just staying with this roll-up archetype that we were talking about, what are some of the potential pitfalls that can keep the integration from being successful and how do you avoid them?

15:25Brian Dinneen: I think by far the most common failure mode in a roll-up is what Matt just said, which is not actually integrating. you're acquiring a whole bunch it's looking good your revenue's going up but at the end of the day you know you go back and you look and and everything's actually still got its own independent system they still got you know their own independent functions kind of you know spread throughout the organization and that can really put a a cap on the ability to do this over a long period of time you don't do this for 10 years unless you're actually able to fully integrate in and have some of that backbone that is a value proposition.

16:09Matthew Maloney: Okay, so we've established that integration is important, but what are some of the reasons that maybe integration doesn't happen or how can it go badly?

16:17Brian Dinneen: What I would say is you can't wait until the integration to be talking about this. The best acquirers that acquire multiple deals a year are very clear upfront that the value proposition that we are bringing, part of that is coming on to our ways of working. And so I think that having that clarity up front and knowing how is that going to create value for the target company then helps you earn a bit of a reputation. The folks who do do it well are able to find plenty of targets that are willing to be integrated because they know that there's going to be some value in that integration. Whereas I think that if there's sort of hesitancy for integration, rather than compromising on the approach, sometimes it's best to find another target.

17:08Matthew Maloney: To build on that, is there a typical way that you see deals structured that further incentivize true integration? Maybe if we stick with the insurance example, I'd imagine there are a number of different ways that the principles of brokerages could be paid out for their acquisition, for example.

17:25Brian Dinneen: It is absolutely true, I think, and I'll try to extract it to larger circumstances too, but sometimes you have owners that have a perspective and earn out clauses are often used to kind of say, okay, well, if X, then Y, that is one tool that is well-trodden. But I think that what is the less common tool is actually understanding what is the motivation of the individual, not just in insurance brokerages, but also other roll-up strategies, which there are plenty now too. How do we think about some of the mom and pop shops coming in? Like this is a way to retire and pass on, but they still want to see the legacy sustained.

18:11Brian Dinneen: And so you can think about like, what does that look like? In other circumstances, it could be somebody who wants to continue growing their book of business. And this is a means to go do that. and engagement prior, even early on in the deal cycle, should be reflective of that individual's aspiration. And one of the things that we say, which I think is quite different, is how often are we bringing culture into the diligence and having these conversations early on to understand motivations of key individuals that are leading the company, but also key roles within the organization to what does great look like for a producer in this case, sometimes meant a little bit of pain because we're going to have to restructure commissions.

18:58Brian Dinneen: But ultimately, if there is more value because you have more offerings, more leads, those are things to kind of counterbalance what might be near-term changes. Okay.

19:11Matthew Maloney: And Matt, I'd love your perspective. What do you see in your client work in terms of encouraging and motivating integration? Yeah, I agree very much with Brian. I think it's a mixture of what is important to the owner and management team of the company to be acquired and the change story, both for themselves as well as the company, how that fits in and together oftentimes can be as important, if not even more, as the dollar value and benefit that they're going to realize. I do think the other is to be very, very sharp on the value creation thesis and value creation plan. What's the dollar amount?

19:49Matthew Maloney: What's the timeline that should be captured? specific initiatives with specific owners and people being tied to that to be able to deliver on time and in full and being healthily rewarded for those deliverables. And delivering earlier does actually matter. The longer it lingers on, the more complicated it gets and you get into this sort of thing. So can you try and drive most of this within a few months versus a half a year a year, particularly in a smaller platform type play. It'd be very different when we talk about this second sort of flavor of things. But these should be fairly quick, fairly straightforward, playbook-y of what's keeping what's there.

20:32Matthew Maloney: And I think it's early on in sort of the dating process, as it were, to be very candid and open as to what and how those pieces fit together and why that, you know, what would be a smaller regional player fits into a larger ecosystem and why that benefits both the owners as well as the broader company and their customers. Okay, so now let's move on to that second archetype that we discussed, the merger of equals. So Brian, this archetype feels even higher risk if the execution doesn't happen successfully. So what are some of the key things that you have clients focus on there?

21:07Brian Dinneen: So in this circumstance, you're bringing together two equally sized companies. And so one of the most important things here is in the previous example, you had multiple at-bats. So it's really your batting average matters. In this case, this is one at-bat. It is a big bet. And so the results of this type of combination are much more, you know, differentiated. It's typically either a big win or a big loss. And some of the things that drive, you know, whether you're in camp A or camp B is, you know, number one, are you able to protect the existing momentum? So this is lots of change. How do we make sure we don't lose our revenue?

21:50Brian Dinneen: Number two, as Matt just mentioned, is there a systemized way to approach synergies? How do we make sure that we are clear ownership, capturing on time, clear plans? Number three, how do we not forget about the cultural elements of this? Are we taking a deliberate approach to institutionalize new ways of working? So rather than just capturing a synergy and declaring a victory, you actually have to change the way work gets done to capture the full value here too. And making sure that culture and the aspects of management reinforce and support those changes is critically important. And then number four, because it's such a disruptive event, this can actually be a catalyst to really make some big changes within each of the organizations.

22:37Brian Dinneen: And so the way I've seen this come to life is thinking about what are those two or three areas that we need to put aside the way it's done today and really redesign a new way of working that allows us to either change the cost curve, capture new segments of the market, or reduce our capital reliance in a very different way.

23:03Matthew Maloney: Super. And so now let's discuss the role of culture in the successive integrations. I'd imagine that culture might play a particularly significant role in this kind of merger of equals. So what sort of cultural due diligence might be done ahead of the deal? And then how do you address the culture within the integration as it's going on? Yeah, Sean, I think it's not only a question, it oftentimes is the question, particularly on this type of deal. Because in this case, it's not an acquirer and an inquiry that's kind of David and Goliath size differences. These are two somewhat equals. And you have egos and you have folks that have built something in particularly in a tech space where these are founders.

23:49Matthew Maloney: They built this. This was their secret sauce and mousetrap. And now they're merging between the two. They're, if not as worried, if not more worried about the culture and how things are going to fit together. And they built it around the way that are things that are intrinsically linked to who they are as a person. Is it more of a culture of top-down mandates? Or is it a culture of consensus, right? These things actually really matter. And so as I mentioned before, it's really important early on, even before a deal is even structured for those top leaders within the confines of confidentiality to start talking about how things operate.

24:28Matthew Maloney: Because it can look great on piece of paper that the two businesses are quite complementary. But if the cultures don't fit together, you're going to have some real challenges to get those together. Where and how is work done? Is it done on the coast? Is it done onshore, offshore? Are you run fast and kind of sort things out in a more agile way? Or is it go slow and make sure that there's no errors along in the development of your new software and technology, right? And so these things really, really matter. And so I think what we see works is one, obviously, this is a multi-level, both at the top, talking through and understanding where things are, approaching things with curiosity and understanding versus mandates and things.

25:09Matthew Maloney: I think then it goes into the change story for those founders, which oftentimes are still around, if not the CEO or president, to talk through why they personally feel like this is an important thing so that folks can hear them, that they trust them. They're not kind of going and disappearing, but rather they're still there. And then it's a number of what Brian Hoff and I do, which is summits. It's a learning and a listening summit. one shares one side, one shares the other, trying to understand how folks work, what works well, what doesn't work well, what would you change? Sometimes those are quite serendipitously where one is trying to fix something, the other is quite good at it, and it's a lift and shift and merge.

25:46Matthew Maloney: Other times, both are very entrenched in the way that they want to do something, and now all of a sudden you've got a bit of a, you need the meat of minds. Is it A, is it B, is it A plus B, or is it let's get a clean sheet of paper out, which oftentimes is required, and we're gonna have a new way of working. So it's not one or the other. And where the real death of some of these deals come up is where they continue, even though it's after the signing and closing, they keep talking about the two different sizes, two different companies or two different business units. That is not the case. It's now one company.

26:15Matthew Maloney: And so even the name of the new future company matters, these things, how they talk about it, who reports to who, they seem small, but these are oftentimes your biggest hurdles and obstacles and mountains you have to climb in order to really unlock what would be a latent value that's sitting in there where people really flourish and drive and work really, really hard in this combined culture versus just simply what may be on a deal thesis or a piece of paper. Got it. And for our listeners, I just want to let you know, we published an episode on the importance of culture and M &A and integrations, and we'll share a link to that in the show notes to the transcript.

26:51Matthew Maloney: And now let's move on to that third archetype, the building a new value proposition with complementary capabilities. So Brian, this scenario seems to be emerging more as companies are seeking to drive growth through innovation, especially into adjacencies. But it also seems to be a very different archetype from the first two.

27:11Brian Dinneen: So on this one, building a new value proposition is not a trivial exercise. I think one of the most important things is having unique insight into the market, into the customers, into other important stakeholders, partners in the ecosystem. Because ultimately, what you're trying to do is change the way value is delivered within an end-to-end ecosystem. Now, to make this real, I'll give just one example here. There were two portfolio companies. One was focused more upfront on capital projects. The customers had large capital outlays, benefits would accrue over decades long horizon. And then the second company was maintenance and ongoing support of that over the next 10 years.

28:03Brian Dinneen: And so each of these offerings was quite different, required very different capabilities. But depending on how the capital project went up front, that would have real impact on how the maintenance would be required on the back end. And so being able to kind of bring this insight to the forefront doesn't necessarily mean that the customer who might be the same customer or they might actually be different customers You really had to understand that cycle and that mentality to say, could we actually do this in a different way where we actually offer end-to-end service that allows us to build more quality into the capital project, which is better for the customer, and then see that benefit over a longer time period because we're also the ones providing the maintenance on these projects.

28:52Brian Dinneen: You're taking some risk off the customer and actually capturing the value for that. And then the second piece is, this isn't just a one-way benefit. It's actually a two-way flow because you're doing the maintenance, you actually also learn about over that time period, where are the weak links? How can we change what we're doing up front to even be more resilient on the back end? And so you get this flow of information from the back to the front, which basically says, here's some continual refinement and improvement. And then the second thing you also see, too, is if you are doing the maintenance, you also have an ability to say, hey, look, you could have a big capital project in five years or you could do a small capital project right now.

29:37Brian Dinneen: And then another, you know, smaller project in two years and kind of spread it out a little bit more, too. And so this insight and lead generation back to the front end also has some benefit, too. and again serves the customer as well as allows this company that kind of built this end-to-end offering to do it in truly a unique way. And so the magic of getting that value proposition right is actually a really, really important aspect of seeing whether this deal will play out. And this is where a PE firm with well-informed, specialized expertise in the specific sub-markets can help identify and find some of these areas where, hey, a completely new way of working just creates significantly more value for the company and for the customer.

30:32Matthew Maloney: And just on this idea of integrating selectively, if you've got a company that's doing a lot of these. How do you define the degree to which they really need to integrate and where it's most important to integrate?

30:45Brian Dinneen: Great question, because I think integrate selectively does not mean do not integrate. And so that's a really important distinction. The way that you figure out where you want to integrate is actually coming back to the value proposition. So how are we going to perform and deliver this service. In this case, I talked about data flows coming back from one to the other to improve resiliency. Well, you need to make sure that there's a pathway and a process to do that, which doesn't exist in either company today, but you need to build those connections. And so thinking about integration from a value-back lens, so where are we going to make those changes that is actually going to create incremental value?

31:28Brian Dinneen: Now, I'll compare that with you know, the skill sets and the capabilities of a large capital project are very different than the skill sets and the capabilities of ongoing maintenance too, by and large. And so those individuals largely still remain, you know, in their existing positions with their existing responsibilities, but now they have a new responsibility to kind of internalize and capture, you know, this, this data feed that's integrated over to take the lessons and learnings and really kind of incorporate that into, into the next generation of product development and offering.

32:10Matthew Maloney: So this value back lens to the integration, it's a really good point. And Matt, is there anything you would add on this archetype before we move on? Any examples that you could share to bring it to life? I think this is one of the unique opportunities, particularly in private capital, where funding actually becomes a key enabler, right? And the management seems being big and bold. A client of mine had opportunities to, because they had certain technologies within the industrial space of plastics converting, but had been serving what I'll call traditional end markets that were kind of flattish to slightly declining when there were applications well beyond that.

32:49Matthew Maloney: And so to acquire a small company that knew how to do that and then to do massive capital to scale what we had seen, because again, it was the meeting of the two different capabilities together up to including the CapEx plan for looking forward when they were coming together was nearly twice what was their yearly EBITDA. I mean, that is a incredibly big, bold move, but you could see what the margins and the growth profile of moving into this market and then de-risking it with acquiring a company that already has some of the capabilities, but not necessarily all of them and merging those two together.

33:27Matthew Maloney: culturally speaking, it's actually quite easy to do that because now people from both sides are saying, I'm bringing on new capabilities and talents and the smaller, more boutique manufacturer then all of a sudden sees themselves as being part of a bigger, larger ecosystem to really scale and serve these end markets. So I think it can be quite exciting for them to see that. And again, it flips a bit of the paradigm from what oftentimes can be viewed wrongly as adversarial into a complimentary where the management team is coming in and saying, listen, we have a healthy EBITDA. We've got a really healthy generation of cash.

34:04Matthew Maloney: We would like to reinvest this into the business to then create this virtuous cycle to then drive top-line growth and margin expansion in the long term. Back to our conversation we had earlier is what is the value creation thesis, right? Whether it's organic, inorganic, a mixture of both, which was what Brian mentioned, it's an and, not a, not an or don't view those as mutually exclusive, uh, ends. And so in this case, the, the, the one, which is slightly different than what, um, Brian said, uh, example that he had on the utility, this is extremely complimentary. It's actually a organic and organic at the same time, which I think is a quite a special little mix to kind of go and do and, and be big and bold, which oftentimes I think, um, in, uh, in, in these settings, uh, you're empowered and actually enabled or expected to raise your hand and think through these.

34:54Matthew Maloney: Wonderful. So now if we could, let's zoom out again. Let's talk a little bit about the capabilities required to execute the integration across each of these three archetypes and what capability building that's needed or that the successful acquirers invest most in. Brian?

35:13Brian Dinneen: Yeah, it's a great question. When I think about capability building, there's really sort of two elements of it. What are the processes, approaches, capabilities that we need to execute? And then how do we actually intentionally bring learning into this process? And I think this is, again, an area where private equity owned portfolio company is often benefit from having that sort of private equity ownership because they can bring a lot of the learnings from across the portfolio to those individual companies and give that sort of outside expertise. You know, having a clear integration playbook that's going to be tailored to, you know, whether it's a roll up where it's, you know, where your end destination is.

35:56Brian Dinneen: It's within the AcquireCo system. It's going to be AcquireCo led. You know, there's key decisions you have to make, but it's really about like, how do we go quickly through this? You're going to have the combination of comparably sized companies. That's going to be a lot more of a best of both approach as well there too. And then finally on this new value proposition, you got to think about how you're bringing in third parties and thinking about the customer lens here. Are we having the right conversations to ensure that this new value proposition will actually have legs and is more than just, hey, we're putting two priors together and bundling it.

36:32Brian Dinneen: We're actually really providing a new way of new offering and a new way of monetizing that offering. And so I think that each one of these approaches, similar debates and questions you have along the way are going to look very different in terms of their approach. And then the second thing I'd say, just on the deal management system, it's really critical to have the right structure, to write governance, and to have a live view of performance management. So how are we tracking against our synergy targets? How are we doing in terms of onboarding the individuals? And those metrics will vary by different type of transaction.

37:14Brian Dinneen: But at the end of the day, making sure you have accountability mechanisms set up that are best suited to whatever deal your deal thesis is, is critically important.

37:26Matthew Maloney: Thank you both. This has been a great conversation, but I cannot end it without first talking a little bit about AI. So maybe we could touch on briefly, what role does AI play in executing the M &A approaches and supporting integrations that we talked about today and maybe thinking about it across the deal cycle?

37:46Brian Dinneen: So I think maybe I'll give some quick observations. If I think about the full deal cycle from M &A strategy and sourcing to integration planning and then integration execution, we see a lot of adoption up front in this M &A strategy and sourcing. And you just think of it, there's lots of analysis in that initial phase. That's where AI can really help you scan large databases of companies looking for those hidden gems. It can accelerate target screening from weeks to hours. And so there's real benefits there. But it's really important to remember that at the end of the day, coming up with that strategy, having conversations with potential targets, that is still very much a human first process.

38:31Brian Dinneen: So even in the area where there's the most adoption of AI, there's still an undeniable human part of it that is critical to make sure you are bringing people on board. You're having those conversations up front of what this is going to look like. The value proposition articulation, all those elements are critical. On the integration planning side, again, there's analysis where you can have these large data rooms with every contract in there. And in the past, you might have only reviewed 15 % of the contracts, but now you can actually use AI to review 100 % of the contracts and just look for specific differences in contract terms and very quickly identify opportunities.

39:15Brian Dinneen: So it's helping kind of catch some more of that long-term opportunity. It also has benefits too, in terms of looking across, you know, customer data sets, looking across financials to really get that apples to apples view of, you know, where might we be serving the same customer. And then finally, on the integration execution sides, you know, I'm a firm believer that integration is a people first process and it actually really requires, you know, change management, the emphasis on culture that we had earlier, but there is a tactical benefit of being able to say, hey, these two different systems, which we haven't quite integrated yet, we now have a dashboard that provides data across them that's rapidly stood up because AI allows us to do that in a much faster way.

40:04Matthew Maloney: Fantastic. Thank you, Brian. And Matt, before we close, was hoping you could comment on how the insights that we discussed today might apply to all companies more broadly, not just PE and how they might differ outside of the PE context. It seems that a lot of the thinking around the archetypes that we discussed and the approaches could apply equally to any company. Yeah, thanks, Sean. It's a great question. I think there's a couple structural differences, but the end of what you're doing is roughly the exact same thing. So structurally, obviously there is a compressed timeframe, right? Number one.

40:40Matthew Maloney: Number two, the deal teams, clearly their day-to-day job is finding and executing deals, right? Which you can find pockets of those in corporate America that are quite good, but isn't necessarily always somebody's full-time job to go out and really do that in a serial way. I think when you think about serial integrations and things, depending on the industry, there are quite a number that are there. We're all familiar with some of the more hold-co-models that would move things in and out both on the acquisition, but also on the divestiture side, right? What is the role that a given product or service plays within the broader portfolio of how things are driving value, right?

41:22Matthew Maloney: But in the end, the plays themselves, it's really, you can leverage all that same thinking of the big bold, what is my value creation plan three to five years out? How am I going to get there? What is going to be organic growth? What is going to be inorganic growth. It's not an or it's an and right and map those pieces out. And if the idea is, which is the classic, you know, perennial question of make versus buy and being humble and honest that oftentimes it might be better and faster and less risky to buy versus to make yourself. I think oftentimes in corporate America that that is a tougher question to answer, because people are so tightly wound to the way in which the company has moved and to go somewhat of a low and slow, invest slowly versus going big.

42:09Matthew Maloney: But I think in the last four or five years post-COVID, this has actually changed quite a bit. The M &A activity in corporate America has picked up. People are being bigger and bolder on both the acquisitions as well as the divestor side, which I find quite refreshing and exciting to kind of go and do. But I think PE can teach corporate America quite a number of things. I think corporate American can teach PE quite a number of things, but learning is all around for everyone. Thank you so much. And for our listeners, we are including some of our other recent research on M &A as a growth strategy in the show notes as well.

42:42Matthew Maloney: Ryan, Matt, this has been a great conversation. Really appreciate you taking the time. Thanks so much for joining us. Thanks for having us, Sean. And thank you to all of our listeners for joining us today as well. We hope you enjoyed the conversation and we would welcome your feedback and ideas for future episodes. Just email us at itsr at mckinsey.com. You can also share your ratings and reviews on any podcast player with many thanks to all who've already done so. We really appreciate the comments and feedback we receive every week and encourage you to keep them coming. And if you enjoyed this episode and you'd like to subscribe, you can easily follow our weekly series on any podcast player where you you can also access our entire library of more than 320 episodes.

43:23Matthew Maloney: Finally, if you'd like to automatically receive our latest publications and insights, we encourage you to visit our private capital practice at mckenzie.com slash PC and our strategy and corporate finance practice at mckenzie.com slash SCF. You can also connect with us on LinkedIn, and we've included links for all of these in the show notes today. Thanks again for listening. We look forward to having you join us again next week inside the strategy room. Thank you.