How can you aspire to lead in the digital economy?

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 30 Jan 2018

Becoming a leader in the transformational age requires a digital-centric approach to capital strategy, dealmaking and process.

Our second Digital Deal Economy Study, a survey of more than 900 executives, finds companies increasingly embracing the digital imperative. No surprise there, given that digital technologies and applications are continuously reinventing and reshaping industry landscapes and business models.

Forging a successful digital future will likely mean buying as well as building capabilities in-house. Today, investors are prepared to reward companies that make bold technology and transformational acquisitions. Digital M&A is defined by the key processes and new ways in which digital capabilities are built through M&A. In the future, only those who can execute digital M&A over a sustained period will be equipped to prosper.

In our survey, 90% of companies are elevating digital priorities in their strategic planning over the next two years. But many are challenged to build an effective approach to fully realize their digital potential. We see clear differences between companies in their ability to transform strategic thinking into digital M&A capabilities and outcomes.

We also looked at digital M&A from the other side of the table, surveying 200 start-up executives globally to understand their preferred sources of funding and what they look for in partners. Many start-ups are looking for investors who can align with their values and offer speed, flexibility and the ability to improve their products and access to markets. While these are areas that corporates traditionally excel in, start-ups rank them lower than other funding sources. Are corporates missing an opportunity to capture innovation?

Digital disruption requires asking hard questions about what your organization is today and what it needs to be tomorrow. Becoming a leader in the transformational age requires a digital-centric approach to capital strategy, dealmaking and process. It’s now time to embrace the digital M&A mindset.

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Chapter 1

Key findings about digital deals

Digital Deal Economy Study

Strategy and ecosystem

Understanding the evolving external environment and aligning strategic digital goals are the primary components for success. Acquisitions are clearly an important part of the mix, and we see 74% of our respondents looking outside their own companies for digital growth. Organizations are still placing significant reliance on corporate M&A departments, which often specialize in identifying and pursuing traditional targets in the company’s “home” sector. But finding targets for digital M&A requires a different approach. Building new digital ecosystems is critical to enable companies to identify new partners and targets.

48%

Companies making significant investments in building a digital ecosystem

Capital and portfolio review

Our survey respondents clearly understand there is a cost associated with digital transformation. However, many are challenged to get their capital allocation balance right. When asked if they have a coherent and aligned “buy” and “build” approach to digital, only 48% agreed. While organizations may be trying to respond to the fast-changing technological landscape, it is important not to make hasty decisions or prematurely react to short-term forces. Continuously reviewing the business portfolio to sustain ambitious acquisition and investment goals is key to future-proofing the business.

90%

Respondents considering digital priorities in their capital allocation planning over the next two years

Deal process

Our findings suggest an overall level of confidence around the processes companies are using to evaluate targets. However, looking at the deeper analysis of the new types of diligence, it is apparent that few are actually employing innovative methods. For example, only 38% are applying intellectual property analysis and just 22% are undertaking cyber diligence. Rebooting M&A capabilities and processes to meet the specific deal demands of the digital environment is key to success.

46%

Executives saying their M&A due dilligence processes are not 'highly effective' for digital acquisitions

Integration

Many organizations continue to use the approaches they employ for post-merger integration of brick-and-mortar assets for digital transactions. But digital M&A requires a much more nuanced approach. Companies may also be targeting a number of digital assets at the same time, so the ability to integrate multiple digital assets simultaneously will be key to delivering potential. Realizing maximum value requires strategic integration approaches tailored to digital transactions.

24%

Companies that are ‘highly confident’ about their ability to retain talent following an acquisition

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Chapter 2

Three levels of digital M&A maturity

Digital Deal Economy Study

On the basis of our research, we identify three levels of digital M&A maturity:

Leaders

A small and elite group of companies (14%) that have undertaken a significant transformation of their M&A strategy and approach. These are experienced digital deal-makers who have been prepared to question and update their M&A approaches for the digital economy, across strategy, capital, diligence and valuation, and post-merger integration.

As a result, they are building a clear digital advantage. Well over half of Leaders say that digital advances have improved their revenue, share price and market share over the past two years.

Adopters

Another group of companies (29%) that understand their own weaknesses. They are beginning to update their approaches to cater for the unique challenges of digital M&A and are building the infrastructure and skills required to fully succeed.

For example, while they continue to rely heavily on corporate M&A departments to identify digital ecosystem partners and targets, they are also increasingly turning to additional innovative vehicles.

They also understand the need for new forms of due diligence and integration KPIs but have not yet acquired the full toolkit.

Aspirers

The majority of companies (57%) are finding key aspects of digital M&A challenging. They are struggling to build effective ecosystems, adapt due diligence to digital dealmaking and integrate their investments without destroying value in acquisitions.

They may be beginning to accept that digital M&A is different from traditional M&A but have not yet modernized their approaches.

One of the risks they face is overpaying for digital assets, making a bet on future growth but facing significant uncertainty about whether the investment will pay off.

Strategy and eco system
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Chapter 3

Seven questions for CEOs and boards

Digital Deal Economy Study

To build a better digital future in the transformational age, here are some questions CEOs and boards can ask themselves:

Buy versus build: future proofing the business
Do you identify gaps in digital capabilities as an explicit part of your strategic planning?

Digital capital strategy: establishing a capital strategy to invest in digital
Are you explicitly considering digital priorities in your capital allocation planning for the next two years?

Strategic portfolio review: deciding when to divest to invest in digital
Do you have a clear long-term divestment strategy as part of your transition to a digital model?

Origination: building a digital ecosystem
Are you making significant and sustained investments in building a digital ecosystem?

Digital valuation: valuing a digital business
Are your valuation approaches for acquiring digital assets up-to- date and effective?

Digital diligence: protecting acquisitions from digital disruption
Do you carry out cybersecurity and technology due diligence?

Strategic operating model: maximizing return through smarter integration
Are you integrating acquired digital assets to fully benefit from all value creation, including managing change in the parent company to embrace all opportunities?

Summary

In the hunt for digital growth, four priority areas can help organizations through their M&A journey.

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.