If you have an ambition but no plan behind it, you’re probably not going to get the results you’re looking for. According to recent McKinsey research on the UK economy, the highest-performing UK companies have grounded their ambitions in a set of five conditions—looking at investors, incentives, sources of growth, partnerships, and people. And the results speak for themselves. On today’s episode of The McKinsey Podcast, senior partners Andrew Goodman and Tunde Olanrewaju speak with editorial director Roberta Fusaro about this research.
In our second segment, we look at the role of the CEO during an M&A transition with senior partner Mieke Van Oostende, from our CEO Insights series.
This transcript has been edited for clarity and length.
The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.
An incomplete economic picture
Roberta Fusaro: Most people look at the stock market to understand how a country is doing economically. If you were to look at the UK stock market, you might believe things aren’t going so well—and that’s partly true, says Tunde Olanrewaju.
Tunde Olanrewaju: The UK stock market, in terms of the FTSE, has not performed as strongly as some of the others across the world, particularly compared with the US stock market. It’s easy to then conclude that there’s something weaker about the UK economy. But if you look at some of the broader factors that define an economy beyond the stock market, how’s the UK doing?
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Roberta Fusaro: McKinsey’s latest research found that there are a lot of bright spots in the UK economy that may not be completely visible to all. Over the past 15 years, for example, a lot of private capital has flowed into the UK market. Tunde says it’s in the trillions.
Tunde Olanrewaju: Based on the latest data, about $1.8 trillion in private equity investments and $0.95 trillion in foreign direct investment flowed into the UK economy. A material share of this capital has been used to delist companies from the London Stock Exchange and take them private, some by financial sponsors and also from international companies acquiring UK companies.
Roberta Fusaro: The upshot here is that the FTSE doesn’t completely reflect what’s going on with UK companies, McKinsey senior partner Andrew Goodman says. That’s why McKinsey created the UK 500: to take into consideration the entire UK corporate landscape.
Andrew Goodman: The UK 500 is a composite that looks at the largest companies in the UK. In terms of revenue, and alongside those public companies, the list also includes some of the largest private companies in the UK and some of the big subsidiaries of international companies that contribute a huge amount to the economy. To give a sense of scale, the UK 500 collectively produces about $4 trillion in global revenue. And it represents about $600 billion in EBITDA.
Economic strengths in the United Kingdom
Roberta Fusaro: As McKinsey partners analyzed the companies in the UK 500, they found that some were doing better than others, especially when it comes to tech-driven innovation.
Andrew Goodman: What’s striking about the UK is that it has a leading position in some areas of innovation that we think may be important in the global economy over time. Three examples of that are artificial intelligence, particularly clustered around [Google] DeepMind and some of the innovations that it has had; bioengineering, particularly regarding research conducted by Cambridge and other universities; and climate technology, where the UK has made some material investments.
It’s pretty striking, for example, that the UK has the largest number of AI start-ups in Europe. A cool success factor for the UK has been its ability to exploit, scale, and grow companies that are associated with those technologies.
Setting the conditions for success
Roberta Fusaro: McKinsey’s research suggests that these high-performing companies have a particular kind of ambition. McKinsey calls it “systematic ambition,” which is . . .
Tunde Olanrewaju: The choices you make and the conditions you create that allow your company to thrive, because just as somebody might have a big ambition to get fit, if they don’t have access to the right equipment and the right nutrition, they probably will not get as fit as they want, no matter how much they want to get fit.
Roberta Fusaro: McKinsey found that there are five conditions that these top-performing UK companies create for themselves, starting with finding like-minded investors.
Tunde Olanrewaju: Be clear that you’ve targeted a group of investors that align with the type of outcome that you want to create for the company. Otherwise, you always have that tension. This is not straightforward to do because you can’t always choose who decides to invest in you. But by being clear about what your stock stands for and being a little bit more purposeful in who you’re attracting and how you promote that proposition to them, we think over time you can shift it.
Roberta Fusaro: The second condition is about incentives, both for the management team and the board.
Tunde Olanrewaju: In many UK boards there isn’t much stock incentivization, due to how companies interpret the governance code and how the governance code is actually intended. That could, in some cases, lead to boards being more focused on managing downside and less focused on creating upside or pushing for upside within the company. So, incentives play a role in setting the aspirations of the leadership, and the incentives at the top cascade into the rest of the organization.
Roberta Fusaro: In addition to incentives, the highest-performing UK companies focus on three sources of growth. Starting with . . .
Tunde Olanrewaju: International markets: more focus on geographic exploration.
Roberta Fusaro: Andrew agrees and says growth in markets outside the UK has driven about 85 percent of all the revenue growth of the largest UK businesses.
Andrew Goodman: They’re really successful at growing their businesses in North America, elsewhere in Europe, and Asia. An example is Ashtead, which is in the business of renting out industrial equipment. It really focused over the past 20 years on growth in North America, and that market now generates more than 90 percent of the revenue for the company overall.
Tunde Olanrewaju: Second, the adoption of technology, either in renovating the business model or in changing the way businesses go to market.
Andrew Goodman: One example is Rio Tinto, one of the world’s largest resourcing companies. It estimated that each of the driverless trucks it uses in its operations can operate an additional 700 hours a year compared with a conventional truck. That’s really driving higher productivity in some of the businesses.
Tunde Olanrewaju: Third, introducing new products and services rather than simply innovating upon existing products and services.
Roberta Fusaro: Those are sources of growth. Now back to the conditions. Another one is building effective partnerships.
Tunde Olanrewaju: The first piece of that is partnering with innovators. Many successful companies were very effective at working with smaller companies to power their new ambitions, and they brought new capabilities to power what the company was doing.
Roberta Fusaro: But big organizations have to be careful—they don’t want to get in the way of start-ups or other small, innovative companies.
Tunde Olanrewaju: A lot of large institutions can be very difficult to work with if you’re a small company. They can overwhelm them with paperwork or diligence that ultimately does not make anybody safer but instead just puts a brake on innovation. It’s about whether you’ve created the conditions for such companies to participate and help power your ambitions.
Roberta Fusaro: And it’s people who power companies. Tunde says the workforce needs to be reskilled to create the fifth and final condition for outperforming peers.
Tunde Olanrewaju: Taking reskilling seriously was something we consistently saw. Selecting new capabilities that you want to build, investing in people, and doing that regularly allows you to create the conditions for new ambitions to be realized.
Roberta Fusaro: It will take time and management’s attention to create these conditions—but for the companies that get it right, their influence will be felt worldwide.
Andrew Goodman: Some of the most exciting opportunities for corporates are where we see them partnering with innovative AI players, biotech companies, and climate tech players. That could be a durable source of competitive advantage for UK companies over the next five to ten years.
Best practices for CEOs to follow during an M&A
Lucia Rahilly: Next up, how CEOs can steer companies through a merger and acquisition, with senior partner Mieke Van Oostende and managing producer Laurel Moglen.
Laurel Moglen: What’s the state of mergers and acquisitions or M&A today?
Mieke Van Oostende: M&As are at an inflection point today. CEOs across industries tell us that M&A is more than ever a vital lever for them. Organic growth as a stand-alone strategy has never compared well with a combined strategy of organic and inorganic growth. This is especially true when companies need to adapt quickly.
Laurel Moglen: What kinds of trends are you seeing in M&A in the recent past to now and across geographies?
Mieke Van Oostende: The US is almost back to the higher levels of M&As we saw in the 2014 to 2022 era. Europe has also recovered, but at a slower rate than the US, and is not back at the levels it once was. Asia has declined their share in the total global M&A volume. Corporate deals are 70 to 80 percent of deals, while the rest are financial or private equity deals.
Private equity [PE] is not yet back to what it used to be, especially in Europe. Something will need to happen in the PE world. The money needs to move, because they’re sitting on trillions and trillions of “dry powder.” The sector perspective is reasonably stable. The top three sectors are gem or industrials, which is the chemical sector; technology, media, and telecommunications—there has been a huge consolidation wave in telecom across the world; and financial and professional services, which includes private equity.
Laurel Moglen: What does inflection mean when there is such a variety across regions?
Mieke Van Oostende: The inflection point is that we’re living in a very volatile world, and CEOs realize that this volatility is probably here to stay. This will not be solved in a matter of years. At the same time, they will also need to do major shifts in their activity.
One trend we’re seeing is a shift toward sustainability. The need for sustainability in the portfolio is why there are so many deals in the chemical and industrial sectors. This is what we mean by an inflection point. Many of the companies are in front of a major shift in their portfolio and activity in their industry, which they will probably not be able to do in an organic way, in the right time frame, nor at the right cost, and so on.
Laurel Moglen: McKinsey research says 50 percent of new CEOs of the S&P 500 launch an M&A in their first two years. Can you talk a little bit more about that?
Mieke Van Oostende: When CEOs first join a company, they want to make their mark and make a shift. M&As are one of the ways to do that. An M&A is often only a starting point of something, such as accelerating growth or capability building. CEOs want to see the full journey through so they can understand the impact of the acquisition or the divestment they have made. We have been interviewing CEOs, and one person said they regret that they didn’t do more M&As in the beginning of their career as a CEO.
Laurel Moglen: What are the best practices you’ve seen CEOs do to shape the way they handle M&A?
Mieke Van Oostende: It might sound obvious, but it involves developing a clear M&A strategy that is not only discussed but also validated by the board. For things to run smoother and faster, successful CEOs need to create buy-ins, socialize the M&A strategy, and have a certain form of validation.
The second element is, how should I be involved as a CEO? A CEO cannot be involved in every deal. With smaller deals, a CEO can empower his or her business units to take the lead on those.
It’s still important that as CEO you form an opinion about whether you agree with the acquisition. But, of course, for the more transformative, larger deals, a CEO is the captain of the ship. The CEO needs to be fully involved, because if there’s any doubt at the top, the doubt will percolate in the organization.
We try to bring M&A back to just facts, figures, and numbers, but an M&A transaction, to a certain extent, is still a very emotional event.
The third practice involves what one of our CEOs called a “chief stakeholder officer.” The CEO manages the CEO’s own people, the regulator, the customers, and, not the least, the target company the CEO wants to acquire. Something critical I have seen successful CEOs do is spend time with the company they want to acquire, no matter the company’s size. The CEO should visit the target company and sit with its CEO. Let’s face it: we try to bring M&A back to just facts, figures, and numbers, but an M&A transaction, to a certain extent, is still a very emotional event, not only for the acquiring company, but for the company that is being acquired.
Laurel Moglen: Can you talk a little bit more about that emotional piece of an M&A transaction?
Mieke Van Oostende: As a CEO, you need to think through the more emotional elements that can make a deal succeed or fail. Location is a very sensitive and emotional topic. People often ask, will my location headquarters be maintained or not?
This is about branding. Branding radiates a part of the company and potentially also part of yourself, especially if you have been the founder of the company. The CEO should think through all of these elements and about how the other side could potentially respond, and then see where you can compromise. During an M&A process, it’s very important for a CEO to structure a dialogue that acknowledges and addresses those feelings.
Laurel Moglen: As part of the M&A process, can you share examples of how CEOs have successfully addressed culture, how it might be changing, and ways to integrate it?
Mieke Van Oostende: I did my first M&A transaction about 17 or 18 years ago. The work culture was defined as an afternoon activity, or whether you shake hands, or wear jeans on Fridays. These types of things no longer define culture. We define culture as mission, vision, values, and then management practices and behaviors. CEOs, of course, set culture. They also need to be a role model for the management practices and behaviors they want to see practiced by their colleagues.
For example, I have seen deals that include a shift from a decentralized model and way of managing toward a more centralized way of working. There are also deals where a performance-driven, facts-based culture is installed. Then there are deals in which a local company becomes part of a global international company, which then also coincides with more unified processes and practices. These are pretty important things, right? It stops being about, “Can I wear jeans on Fridays?”
Laurel Moglen: How do the best CEOs communicate what’s happening to various stakeholders and teams to keep up morale?
Mieke Van Oostende: It’s about bringing a clear, simple, compelling story about why it makes sense for the companies to come together, how they will build upon each other, how they will accelerate the corporate strategy, and how they will accelerate growth. Of course, it’s not only the job of the CEO but also all of leadership to achieve these goals.
Typically, true communication starts when the M&A is announced. I have seen many CEOs do this very well. They communicate to the organization through a town hall, through the press, and to customers.
But sustaining the communication is where I tend to see challenges. Often these processes, even for small deals, can take one, two, or three years, because of things like technical integration and regulatory approval. So, it’s important to demystify the integration and make it a two-way conversation through town halls, Q and A’s, and so on.
Laurel Moglen: Is there anything a CEO should be doing very specifically to retain talent during an M&A?
Mieke Van Oostende: Most CEOs believe they need to retain critical talent, and they tend to focus on the target company. They do not necessarily apply that same focus to their own company. It means a lot to people to have a brief conversation with the CEO, saying “We know what you bring to the company and you’re part of its future. We might not know in which role and in which part of the company, but you’re part of the future company.”
The second big element is to think through your employee value proposition. In some cases, the acquisition will not change your employee value proposition, but it is important to communicate and reconfirm. And in other cases, it will change.
The third thing is we tend to focus on the 2 to 5 percent top talent, which we need to retain. But it’s important to not forget to engage the rest, the remaining 95 percent of the organization, which keeps the wheels turning.
Laurel Moglen: How are companies turning to new tech, like generative AI [gen AI] and others to help with that M&A?
Mieke Van Oostende: M&A so far has been a reasonably manual process. But now with AI and gen AI, you do see a true change in the making. With AI, CEOs can screen more data sets at a global scale, and not only at the company level but also the assets within those companies, and in a much more detailed way.
The diligence and negotiation progress is less people intensive from a number-crunching and paper-crunching point of view. One of the most beautiful use cases is during the planning and execution of an integration or a separation. We call it the gen AI coach. This is where you have a ChatGPT-type of application that is geared toward M&As. It gives a much faster starting point compared with only one or two years ago. The human touch is still necessary, of course.
Laurel Moglen: Are there common pitfalls that happen with CEOs during M&As?
Mieke Van Oostende: First, a pitfall is when decisions aren’t made fast enough, because often they are difficult decisions, and they involve people. Giving transparency sooner, even if it’s a painful decision, is more appreciated than keeping people in the dark for longer.
A second pitfall happens when a deal has been negotiated and then integration, in all its facets, is delegated to the senior manager. That’s not what we would advise CEOs to do. There are a few topics, culture, target operating model, leadership, composition, where you truly need to keep the decision making yourself.
A third pitfall can occur when building the leadership team, which consists of direct reports and the executive committee. In some cases, none of the executives are the right fit for doubling the size of that company. I have seen CEOs be very honest and purposeful at that moment and bring in external people to further refresh the leadership. This is something that CEOs need to shape in such a journey.
