EY’s Andrea Guerzoni on M&A in the digital age

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The digital megatrend is here to stay, and in EMEIA, as well as across the globe, businesses are using M&A to adapt to this new digital world.

Are businesses still underestimating the impact of digital? Probably — after all, many businesses underestimated the impact of the internet back in 1999. The vast majority of traditional businesses still lack the expertise to build in-house digital capabilities. Consequently, M&A has become a fast-track route to expanding those capabilities and growing intellectual property (IP) assets. In terms of digital, buying rather than building has many advantages.

As recurring transactors, private equity is a critical sector for M&A. PE firms are eager to hire — or acquire — people who understand the impact of digital on business and can help to better assess risk and reward in associated deals.

What those digital-savvy people know, is that some of the criteria that used to apply to target valuations and deal making is no longer applicable. New assessments need to be applied and would-be acquirers need to change the way that they formulate their M&A processes — from strategy to execution and throughout integration. This can have a significant impact on the value creation story. Are the businesses acquired at high prices over the past five years fit for this digital future?

What kind of additional investment is needed to keep pace to ensure that the value on exit will not be dented?

This narrative is clearly taking shape across EMEIA. We see more and more PE houses strengthening their digital strategies, implementation and diagnostics to ensure that their portfolio and new acquisitions are aligned with digital strategies.

It is quite difficult to precisely assess the impact of digital on M&A, as the numbers are still relatively small. But it’s clear that this phenomenon is spreading fast.

We are seeing more corporates and portfolio companies abandoning traditional target scouting techniques and trying to understand how competitors will respond to digital. They know that it will be a case of disrupt — or be disrupted. And that is leading to an increasing number of talent and IP-motivated acquisitions to build digital capabilities. This is going to become the new normal.

Over the next three to five years these deal trends will continue to accelerate. We will see corporate functions and business units move in the digital direction as a normal course of business. Before long, we will no longer differentiate “digital M&A” from the norm. The digital storm will pass, but the deal landscape will have been altered forever. 

Andrea Guerzoni is the Europe, Middle East, India and Africa (EMEIA) Transaction Advisory Service Leader, EY