WHEN A PE FIRM MUST TRANSFORM A NEW PORTCO TO DRIVE FRESH GROWTH AND REVIVE AILING MARGINS
- A private-equity (PE) firm was considering acquiring and taking private a publicly owned financial technology business.
- The target had grown through aggressive M&A but hadn’t effectively integrated its acquired companies’ systems and assets, leading to operational inefficiencies that had begun eroding margins.
- The investors saw an opportunity to unlock new value from the target by launching a whole-company transformation program and asked AlixPartners to help, starting with an operational due diligence assessment progressing through preclose planning and monitoring and supporting implementation of the value creation plan.
THE SITUATION: A COMPELLING OPPORTUNITY TO UNLOCK NEW VALUE FROM A STRUGGLING TARGET
A private equity (PE) firm identified an opportunity to unlock new value from a publicly owned financial technology business by buying the company in a take-private transaction and launching a whole-company transformation. The target had grown aggressively through a series of acquisitions but hadn’t effectively integrated its acquired companies’ back-end systems, workforces, and technology platforms.
Result? Costly inefficiencies had crept into its operations, eroding profit margins.
The PE firm was convinced that a large-scale transformation program aimed at smarter integration of the target’s systems and processes would boost operating leverage throughout the enterprise. With that possibility in mind, the firm asked AlixPartners to conduct an operational due diligence on the target.
That initial assignment led to a yearlong partnership to support the transaction—and the transformation—through additional phases of the PE investment cycle.
In just eight months, AlixPartners helped the PE firm put initiatives in place that fully captured $110 million in estimated cost savings from new operational efficiencies that the transformation program delivered.
Those savings constituted about 18% of the portfolio company’s addressable cost baseline and translated into a $1.1 billion–$1.65 billion increase in the valuation of the company.
THE APPROACH: COMPREHENSIVE, END-TO-END SUPPORT PAIRED WITH CLOSE COLLABORATION
AlixPartners supported the PE firm through key stages of the target’s acquisition and transformation efforts. Highlights include the following:
Operational due diligence: Taking stock of the target’s operations
Our client had asked us to conduct an operational due diligence on the target. To that end, we applied our due diligence methodology to assess effectiveness and efficiency across the target’s operations, including in its R&D, product development, IT, back-office organizations, and its use of third-party spend.
The evaluation set the stage for us to identify opportunities that would improve the target’s performance on cost as well as revenue management, with an eye toward enhancing margins.
Postmerger integration: Defining a whole-company transformation program
Drawing on findings from our operational due diligence assessments, we used our QuickStrike® methodology to support the investors in defining a set of transformation initiatives aimed at capturing efficiency-based cost savings throughout the portco during the postmerger integration period.
Examples of the projects involved:
- Optimizing the organization’s structure and business-line operating model to reduce required managerial layers and spans of control
- Supporting the investors in leadership transition and organizational stabilization
- Establishing offshore centers of excellence for the portco’s engineering and IT functions
- Reducing third-party spend by consolidation and direct negotiations with tier 1 suppliers or by conducting a competitive request for proposal in certain strategic categories such as field merchandising and IT-value-added resellers
- Moving the accounting and customer support organizations to lower-cost locations
Keeping margin improvement in mind, additional proposed initiatives focused on enhancing revenues—through improvements in the target’s sales and marketing as well as its go-to-market strategies.
Value creation: Quantifying advantages to be gained from the portco’s transformation
Leading into—and shortly after—the close of the transaction, we partnered closely with the investors and the portco’s management team to activate and orchestrate the transformation initiatives laid out in the operational due diligence and in the value creation plan. Leveraging the output from the diligence accelerated the identification, quantification, and planning of value capture in this critical phase of the deal cycle.
As part of that step, we also:
- Developed work-stream-specific road maps, timelines, and milestones for each initiative—all of them aimed at accelerating time to value capture. For instance, we crafted and implemented a plan for offshoring part of the target’s accounting organization in just four weeks—a process that typically takes as long as six months.
- Established and led the transformation management office to ensure proper governance of the change program. And we established a cadence for deep-dive working sessions to validate progress and refine change initiatives as needed during implementation.
- Sized each opportunity’s benefits as we aligned with management and the investors on the initiatives to create a pipeline of initiatives aimed at transforming the portco.
When it came to savings, all told, the proposed initiatives were expected to deliver an estimated net annual savings of $110 million.
To ensure that the portco’s management team would have accountability for realizing those savings, we removed the $110 million from the company’s roughly $600-million addressable cost baseline. Moreover, we worked with the company’s financial planning and analysis group to align each opportunity with an individual cost center, and we modified budgets to track progress and monitor variance to the plan.
Finally, we installed a forward-looking key-performance-indicator dashboard so the investors could gain foresight into whether or when the company might deviate from the plan.
THE SOLUTION: A SCALABLE NEW OPERATING MODEL
AlixPartners’ ability to deliver collaborative, end-to-end support for this investment resulted in a new operating model that the transformed portco could easily scale in the future.
The model boasted several distinctive strengths. For instance, it:
- Accelerated delivery of the savings garnered from the value creation plan defined in the investment thesis.
- Simplified and standardized the portco’s previously fragmented accounting and settlement systems.
- Incorporated a new, enterprisewide procurement capability that enabled the portco to capture new savings from its vendor base.
- Used its newly created centers of excellence to drive effectiveness and efficiency in shared services within the portco, such as engineering and IT.
THE SOLUTION: A SCALABLE NEW OPERATING MODEL WHEN IT REALLY MATTERS: 100% OF $110 MILLION IN TARGETED SAVINGS—DELIVERED FAST
This case demonstrates the value that AlixPartners’ approach to supporting PE investments can help unlock. As the outcome shows, that approach is distinctive in the following respects.
- We support our PE clients throughout all stages of the investment life cycle: pre-transaction, pre-close planning and value creation, realization of an asset’s full potential, and crisis management.
- We identify, drive, and help secure sustainable improvements in portfolio companies’ performance.
- We work side by side with PE sponsors and their portfolio companies’ management teams to ensure that deals deliver the required value.
Our comprehensive, collaborative approach enabled this client to quickly and fully realize $110 million in efficiency-based savings in the portco it had taken private.
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