- How will you value assets and capabilities?
- How will you assess cyber risks related to a proposed deal?
- How will you integrate acquired digital capabilities into your current business?
From assessing value drivers to due diligence, there are challenges that need to be addressed when dealing with M&A driven by digital transformation.
Respondents highlighted a number of particular challenges when buying digital capabilities, including integration (e.g., IP, systems, technology), talent management and retention, and the commercial assessment of value drivers.
Moreover, the rise in acquisitions has not just come from technology companies buying within the sector, but from strategic buyers of all types — many of whom will not have the knowledge base to deal with challenges that are specific to technology transactions.
1. Value and new due diligence
Valuing digital targets — some of which will be pre-customer, pre-revenue and pre-profit — can be as much art as science. Good data is essential to build buyer confidence and allows a better assessment of the value of capabilities acquired.
However, specialized digital-related due diligence (including technology, IP valuations, cybersecurity, social media and data analytics) was the fourth most significant challenge cited in our survey. When buying a start-up or a fast-growing tech business, the due diligence demands can be very different. Due to the competitive nature of the industry and the pace of change, these innovative companies are snapped up swiftly. Bidders need to change their due diligence process to match the market.
The ability to quickly and efficiently analyze the vast amount of data at a company’s disposal will have a dramatic effect on dealmaking. Acquirers need more sophisticated and powerful processes for identifying, approaching and screening opportunities. Working with the right advisor can play a pivotal role in understanding and realizing value from a transaction, while also reducing risks.
2. Taking on talent
Similar risks and clashes can occur when it comes to a target’s people and culture, especially when acquiring start-ups. For acquirers, balancing the founder's need for entrepreneurial autonomy with the incumbent’s established processes can be a major challenge. Further, major corporations and start-ups have different attitudes to the treatment of talent — the very talent you are hoping to retain for your digital strategy.
Acquirers should identify key people early in the deal process and work to win their engagement and build trust. If there is outstanding talent in the target company, offering them larger roles in the organization can be motivational. Tie-in periods can show the benefits of being part of a larger entity.
If designed well, retention agreements can buy time to engage talent, articulate what they are going to do and really live it so that people are deeply ingrained in the organization and want to stay beyond the agreed time. Companies need to ask themselves how they can motivate and use the talent team as a catalyst to spark the leadership team into action.
3. Integration issues
Post-deal integration, IP, systems and technology must be carefully addressed. More than half (55%) of respondents highlight integration as a significant challenge. Yet, only 37% of respondents to our survey have a different integration strategy for digital transactions. In addition to technological legacy concerns and compatibility issues, regulation and competition law could be an issue. When acquiring a cloud-based business, for example, there may be risks associated with its use of technology depending on the market, which can complicate a deal.
In order to protect investment, buyers need to have a different approach to integration. This could be a tri-modal model: keeping the incumbent business ticking, incentivizing everyone on the innovation group, and buying a new business and keeping it separate. Some companies may not be mature enough to integrate.
Digital — defining a new normal for M&A
The entire process of deal-making is being transformed. Increased competitive intelligence and better opportunity analysis are required to spot and make the right deal in today’s complex marketplace. In the face of quick-footed competitors, the pressure is on to keep pace and make capital decisions around acquisitions, alliances and JVs quickly.
Companies need to be more proactive in terms of pipeline management and deal origination, dedicating more internal resources and time than they did in the past to identify the right targets. They now have to evaluate potential acquisitions much earlier, long before the actual transaction. Corporate development functions will need to be able to use advanced analytics of big data, mining vast amounts of structured and unstructured information and turning that into a commercial advantage.
New ways of measuring performance through diligence — social media diligence, for example — will help determine whether assets fit the strategy or help change the strategic direction of a business.
Evaluating a company’s digital readiness is now crucial in a transaction. If a potential target company is not set up to adapt to digital disruption, then it will be complicated to try and bring it into a business that’s already digitally focused.
The question you should be asking is "How well does it fit into my ecosystem?"