Capturing Deal Value: Enabling Digital Capabilities Through M&A
Since 2016, corporate buyers have increasingly targeted acquisitions of technology/digital companies. According to PwC’s 2018 mid-year deals report – four out of ten acquisitions of technology companies came from non-technology companies. This trend is expected to continue as enablers of value shift to include automation, data and analytics, Artificial Intelligence (AI) and the Internet of Things (IoT). Companies are increasingly looking at M&A as a key component of their innovation strategy – notable examples have been Walmart’s (NYSE: WMT) acquisition of Jet (e‑commerce), Unilever’s (NYSE: UN) acquisition of Dollar Shave Club (e‑commerce) and Ford’s (NYSE: F) purchase of Chariot (ride share).
Technology acquisitions require a very different methodology and approach to integrations. Traditional integration methods are designed for situations where the acquirer is looking to gain through economies of scope and/or scale. Technology acquisitions, on the other hand, are transformational and face a set of unique challenges across four dimensions.
- Culture: Workplace values, norms, and attitudes vary significantly between the companies and the traditional approaches of adopt-and-go or best-of-breed do not work well.
- Capabilities: The companies work in distinct sectors with their own unique capabilities which can be difficult to integrate under one unified corporate framework.
- Speed of integration: Tech trends are evolving rapidly, and companies are pursuing multiple small, narrowly spaced acquisitions which require significantly higher levels of agility and experimentation.
- Value delivery: Valuations are high for technology companies and the value delivery cycle for such acquisitions are usually much longer than those of traditional M&A.
That said, traditional companies acquiring digital capabilities can unlock huge potential by adopting a very different approach to the integration.
Pre-deal: Bold transformative value ambitions, confirmed through due diligence
For tech acquisitions, companies need a clear thesis ahead of their acquisition that drives clarity on their transformational goals, alongside diligence that validates the thesis and identifies further risks and opportunities.
The deal thesis needs to focus on the product or service the tech company is providing, and account for the four‑C’s (customer, channel, capability, and cost). Integration leaders play a critical role in allowing an up-front investment in discovery and scenario planning to establish the overall strategic goals.
Diligence, in the traditional form, focuses on hard factors like valuation, synergies, and risk. When tech companies are involved, other softer factors need to be evaluated, including human capital aspects (people, culture, and values) and technological aspects (product release roadmaps, scalability, and research and development capabilities).
For tech acquisitions, it is easy to get caught up in the hype and drive for speed. For example, when Ford acquired Chariot, it believed the crowdsourced shuttle bus would serve a mass consumer market; a few years later, it has successfully pivoted to focus on enterprise services for corporate clients.
Agreement to close: Deliberate integration strategy
When transformation is the goal, organizations are finding strategic success increasingly elusive, while being able to deliver against the financial and operational integration goals (PwC’s 2017 M&A Integration Survey).
Integration strategies for tech companies quite commonly involve back office, but with less deliberate strategies for operations and sales. This is driven by the fear of losing key resources from the acquired company.
Successful integrations happen because the parent company has a very deliberate integration strategy. Walmart, for instance, implemented a reverse integration strategy once it acquired Jet.com, preserving the tech company’s independence while learning from its features, functionality, and people. The company established Jet as a separate business unit and inserted its own employees in key positions to provide the expertise needed to quickly scale the company. It paid close attention to the capabilities and established the target operating model – how their own features and capabilities can complement those of the target company. Through the deal, Walmart was able to deliberately fast-track the development of its own e‑commerce capabilities, and now competes with Amazon in multiple markets.
Post-close: Agile execution, focused on people
Agility is key when it comes to execution. The big-bang integration approach of prior models is not realistic. For technology acquisitions, the approach needs to recognize the difference in operating principles, take into account shorter product cycles and adopt an integration methodology suited to a fast changing and uncertain landscape. Frequent huddles, dynamic planning, and short sprints toward attainable checkpoints have delivered better results than the traditional stepped integration methodologies.
Culture is an area that is often left to evolve, rather than applying a deliberate approach. If the integration strategy is the frame, culture is the glue that brings it all together. PwC’s 2017 M&A Integration Survey highlighted the importance of culture: successful dealmakers, measured by the ROI of their acquisitions, are significantly ahead of the pack in achieving successful cultural integration. These companies have applied a quantitative approach to culture integration with a heavy focus on change management rather than the adopt-and-go approach that was typically used in the past. These companies pay attention to helping employees work through small changes to employee perks, policies and pay-scales, to minimize loss of key employees through the integration.
Tech company acquisitions are disruptive by nature and they require new integration methods and approaches. And while there is no one-size-fits-all solution, there are quantifiable assessments that can be used to determine how to best align tech and non-tech companies. By taking the time to plan and strategize properly, acquiring companies can unlock huge potential — and reap the benefits of digital disruption for themselves.
PwC specializes in helping clients develop best practices, and provide the tools they need to assess their deal value as they plan for their continued tech evolution. Get in touch with Sachin or Jensen to learn more!