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MERGERS AND ACQUISITIONS IN A DIGITAL WORLD

The digital M&A Playbook focuses on digital markets and requirements

Technological innovation, digital solutions, and increasingly demanding customers continually challenge companies to overhaul and update products and rethink their internal processes. As changes in the business environment become more and more radical, at times completely disrupting existing business models, sometimes drastic action is required. Agile startups develop groundbreaking technologies, for example based on artificial intelligence or blockchain technology, and not only do these offer commercial potential, they can also have a strong societal impact. Such startups increasingly become the target of mergers and acquisitions (M&As) and challenge firms to reorientate. The talk here is of so-called Digital M&As. To help firms achieve such a turnaround in practical terms, Steinbeis Consulting Mergers & Acquisitions GmbH has developed a tool called the Digital M&A Playbook.

SMEs with small workforces are particularly likely to drag their heels when it comes to investments in digital solutions. They run the risk of allowing their businesses to fall behind in terms of future competitiveness and lose track of the increasingly digital world of international business around them. According to surveys carried out by industry association Bitkom, 56% of such firms say they want to adapt their portfolio or business model to keep pace with digitalization, but only 34% of those businesses have an interdepartmental digital technology strategy.

DIGITAL M&As: THE CONCEPT

The Digital M&A tool offers firms an opportunity to lay down and implement a digital transformation strategy. The global transaction value of digital M&A deals amounted to $658 billion in 2017, equivalent to one quarter of the overall M&A market, making digital deals crucially important to business. One issue that has to be addressed, however, is the actual company value of digital enterprises, which are sometimes valued at up to 40 times their business turnover. Increasingly, attention is turning to synergies and access to certain technology. Cultural difference should also be expected, and this is where certain holes begin to appear in the conventional logic applied to M&As. To overcome this, a digital mindset is required.

DIGITAL M&As: APPLICATION

Understanding the underlying concept behind a digital M&A is a relatively easy task – unlike practical application, which can be challenging. As a result, Steinbeis Consulting Mergers & Acquisitions has developed a Digital M&A Playbook that can be used to foster a digital mindset and realize a digital M&A strategy based on the following five drivers:

  1. Aim for ambitions goals
  2. Take risks, accept risk
  3. Systematically expand digital capabilities
  4. Assess the strategic importance of possible targets
  5. Plan and design transformation processes

Disruptive technology will also make new business models possible in the future, or make them more efficient. So companies with a good understanding of technology and trends will be particularly likely to benefit if they can identify efficient and scalable application options for such technologies at different stages of their company value chain. Regarding the digital strategy itself, planning timeframes need to become shorter and shorter and management approaches will have to be increasingly iterative and agile, ideally based on the digital transformation pyramid. The existing understanding of M&A processes is only of limited use with digital targets. Transaction stages do still adhere to traditional processes, but there are marked differences within individual stages of transactions.

The Digital Transformation Pyramid
© 2019 Dr. Holger Schmidt | Netzoekonom.de | TU Darmstadt | Ecodynamics | Plattform-Index.com, based on: Patrick Turchi

 

One example of this is a hidden champion – a global market leader in equipping ambulances and paramedic helicopters. The company has already developed a digital technology strategy that will focus not only on systematically linking medical equipment (such as defibrillators) to the internet in order to use predictive analytics, but also on connecting ambulances and helicopters to hospitals in order to quickly share vital statistics. The firm was only partly able to acquire the necessary skills internally, so its first step was to bring on board an innovative company specialized in data analysis as a collaboration partner – and ultimately acquire it.

The traditional B2B market was in stagnation, so the next step of its digital technology strategy envisaged focusing on the quickly expanding B2C sector, such as the evaluation of patient data gathered by smart watches and other wearables. The aim here was to identify interesting startups offering innovative ideas, network evaluations, and opinions in the social media. In terms of perceived synergies, somewhat untraditional synergies were considered particularly important when it came to the assessment of the value of the company. The Steinbeis experts quantified these by conducting an objective evaluation of things offered by the buyer and skills brought on board by the acquisition target.

The due diligence process was mainly based on an assessment of future expectations, partly because a retrospective analysis was not possible due to a lack of data. The key people at the company were of tremendous importance, however, especially given the early timing of the acquisition. As any potential offered by the company was closely tied to these individuals, an attempt was made to understand their capabilities and motivations. For the buyer, it was important to communicate with the digital target in such a way that would pave the way for a quick business transaction in order to make the best possible use of technological momentum. As the deal moved forward, the buyer had to carefully consider the degree of autonomy expected by the target managers and tie in management so that know-how could be transferred as efficiently as possible. Earn-out options were also put in place to link a proportion of the buying price to successful outcomes. These would be paid in subsequent years.

Once the transaction was completed, one priority of the post-merger integration process, which would be critical to success, was that key people at the target company would stay with the company. Other important factors that had to be considered during the post-merger integration phase were assurances that these people would be granted sufficient autonomy, the firm would be more open to failure, and there would be a greater willingness to take risks. Temporary staff arrangements and job rotation arrangements also helped with the success of the transaction and digital realignment.

The focus of the Digital M&A Playbook lies in two areas – potential and the future, not in proven performance and the past. This focus transcends many aspects of the Digital M&A model and, for example, it lends a completely different meaning to company evaluations and due diligence. Assessment parameters such as risk and success have to be re-calibrated and the significance of cash flows has to be re-examined. Depending on the nature of the integration process, soft factors such as company culture become more important; these subsequently become clear when examining how people see themselves, how willing certain people are to take risks, and how much autonomy people require. The Digital M&A Playbook developed by Steinbeis Consulting Mergers & Acquisitions provides small and medium-sized firms with useful support, not only in gaining experience in dealing with digital targets, but also in standardizing processes.