Will your merger and acquisition strategy solve digital challenges or create more?

By

Tony Qui

EY Global Transaction Advisory Services, Chief Innovation Officer

Passionate digital leader and innovator transforming companies in disruptive growth through M&A, partnership and JVs. Connector of corporates and start-ups. Proud father of two children.

5 minute read 26 Jul 2018
Related topics Digital Trust Risk Growth

Show resources

If you’re considering M&A to get ahead of disruption, you need to have the right digital mindset – or risk picking the wrong targets.

This article is part of a collection of insights about digital trust.

 

The rapid transformation to a digital-first world has dramatically changed the business ecosystem. The walled garden that many businesses operated in just 10 years ago is now gone, as the borders between companies have become increasingly blurred. Across the value chain, commercial relationships have become increasingly complex. At the same time, we’ve seen customer behaviors, demands and expectations constantly evolve in response to new technologies. All this in turn has fundamentally changed the way we deliver goods and services.

Building the necessary capabilities to meet these new, continually evolving realities is fundamental to business success in this transformative age. To respond quickly, companies are increasingly looking at inorganic growth – through M&A, joint-ventures (JVs), partnerships or alliances – to fast-track innovation and build their digital ecosystems. But – as with everything else – this approach comes with some major risks, from unforeseen disruptions destroying the value of acquired assets to failing to achieve your desired goals.

Let’s look at the four key challenges of M&A in this disruptive age and what you need to consider when dealing with them at each stage of the deal.

ey-Welsh-Open-Cube-Championships
(Chapter breaker)
1

Chapter 1

Are you solving problems, or increasing complexity?

Are you solving problems, or increasing complexity?

Getting M&A right is increasingly tricky in a rapidly changing world where the next big thing may turn out to be a passing fad. According to our latest Digital Deal Economy Survey , companies are allocating significant funds to digital. However, in their eagerness to expand their digital capabilities, they risk making the wrong kinds of acquisitions and alliances – ones that may seem to meet current needs, but which won’t help drive growth in the long run. They need to better understand the potential upsides of taking the right strategic risks to make sure they pick the right targets.

Deal-making in the digital age presents four key challenges:

  1. Industry convergence is increasing M&A complexity – As industry lines blur , businesses are increasingly buying across traditional boundaries. Disruptive forces might come from an unknown angle and if you can’t look ahead of them, the chance is that you are left behind. This creates an array of potential challenges – from the need to understand entirely new business areas to adapting to different rules over regulatory compliance. Do you have the right knowledge about these new industries and how they operate? Who are your competitors and who are your allies?
  2. Portfolio management is becoming more urgent – Digital disruption has forced companies to actively assess their existing portfolio far more frequently . You may need to sell in order to raise capital to fund new acquisitions. But with the landscape changing so fast, how can you tell what to buy, what to keep and what to divest?
    Adjusting your portfolio to make it fit for purpose can create new complexities and risks. Deals increasingly come in a variety of structures – from JVs and partnerships to alliances. This brings a far more complex environment to manage with different peoples, systems and locations. How are you governing all of these?
  3. Valuations may include unfamiliar assets – Many companies still rely on traditional valuation methodologies , such as precedent transactions, when it comes to bidding for new businesses. This risks not only overpaying for the target but potentially not knowing what you are buying. If you are buying bleeding-edge technology, are you buying the tech assets, the IP or the people?
  4. Business cultures can be difficult to merge – When it comes to partnering or collaborating with startups and cutting-edge tech firms, getting the right cultural fit is critical to lasting success. Most of these businesses aren’t looking to be swallowed up by established organizations – plus you risk destroying their innovative spirit that makes up a significant proportion of their value if you do. Do you share the same vision or philosophy? Do you integrate them now or should you keep them as a stand-alone? And, how do you retain talent?
ey-Man-Balance-Tight-Rope
(Chapter breaker)
2

Chapter 2

Do you know what risks are worth taking?

Making the right digital deals

To overcome the current complexities of M&A, companies need to look at their deal strategy. From defining your company’s goal to identifying targets, and from valuation and due diligence to effective integration, organizations must find the right balance between caution and opportunism. How can you get ahead of your competitors? How do you spot the best deals among all potential targets/assets? How do you avoid buying a lemon?

1.   Origination

Identifying the right targets amid ever-morphing landscapes requires a considered approach. Companies should also seek to avoid the theater of innovation by making acquisitions to launch high-visibility initiatives that don’t have a viable long-term business strategy.

Start by understanding the impact of disruptive forces on your industry. One approach is to change the way you approach risk management, giving strategic decision-makers within your organization a much clearer understanding of where the threats and opportunities lie. Which business models are driving growth? What are your competitors doing? A data-driven approach can help you better identify the capabilities that you need to invest in.

2.   Digital due diligence 

It is critical to look at the asset from every angle, and old approaches to M&A due diligence and valuation models no longer cut it.

When evaluating a new acquisition, alliance or joint venture, companies should assess the digital outlook for both the business and the markets in which it operates:

Focus on data-driven approaches to valuing the assets utilizing a mix of methodologies. Use data and social media analytics alongside innovative processes such as IP and patent review and cyber and code diligence to fully understand the value of acquired assets and mitigate any potential risk.

Without this kind of thorough assessment, you risk overpaying for an asset. And you could also discover other potential problems, such as IP exclusivity, cybersecurity, and employee non-compete clauses. Even the relatively simple challenge of technical integration could take so long to solve that the deal no longer looks like the solution it first did.

3.   Post-merger integration

Consider an integration strategy as early as your initial portfolio review – and continue to develop it throughout the deal process – or you may run into avoidable risks and the potential benefits could be squandered.

With digital M&A, some companies will be left as stand-alone and some will be integrated immediately, depending on the assets and the structure of the deal. For example, if you are buying for technology or patents then you may integrate the technologies earlier, but if you’re buying a product or different business models then you leave it alone. You need to understand this and determine the right governance model from the outset or risk not realizing the full potential of the deal.

When you are developing your integration plan, then you need to ask yourself:  

  • How are you going to overcome the challenges in integrating the technology used by the target?
  • How are you going to bridge the cultural differences that might arise?
  • How are you going to manage the potential cybersecurity and compliance issues that could emerge?

Failure to do this could see trust between partners – or between management and talent – break down.

Rather than focus on arbitrary metrics, based on set targets, timeframes, and projections of profits, businesses need to develop clear outcome-focused milestones when looking at integration. To pick the right metrics, you need to ask yourself what results you are looking for. With digital innovation, much of it is about the huge potential over the short-term gain. Having outcome-based metrics can enable more effective decision-making and allow for agile innovation.

The new M&A mindset for the new business reality

We’re in a very exciting time, with huge opportunities for the companies that have the capabilities, ambition and boldness to take control of their new digital ecosystems, turning areas of potential risk into new avenues of growth.

But doing so means having the right M&A mindset. We need to be looking at deal making through a digital lens – one that sees potential partners and targets in terms of how they can fit into the digital ecosystem. But this mindset will also seek to identify the likely pitfalls in advance, develop strategies to avoid downside risks and seize upside ones, and use this clarity of understanding to build confidence and trust.

Summary

To turn risk into growth, organizations need the right M&A mindset.

About this article

By

Tony Qui

EY Global Transaction Advisory Services, Chief Innovation Officer

Passionate digital leader and innovator transforming companies in disruptive growth through M&A, partnership and JVs. Connector of corporates and start-ups. Proud father of two children.

Related topics Digital Trust Risk Growth