The strategic importance of digital M&A has grown significantly in recent years as companies recognize that digital capabilities are a key factor separating performance leaders from losers. There has been a surge in trading in digital assets over the past year as early signs of recovery prompted companies to resume acquisitions.
But there are some unique challenges to buying a technology company. Defining goals and ensuring they meet buyer ambitions requires companies to develop an approach for each stage of the transaction.
Two areas in particular confuse a large number of companies. Leading buyers need to define a clear rationale for digital M&A and a theory of value creation that supports corporate strategy. Then, once potential targets have been identified, buyers should weigh their strategic and integrated approach with the unique value they want to achieve in practice
Develop a clear digital M&A strategy
Companies often take a “build, do, target” approach to closing digital deals before deciding what they want to achieve and how they will deliver a particular digital solution doing. This asset helps companies execute their broader corporate strategies. If your goal is to monopolize a multi-billion-dollar market within 18 months, you cannot achieve that goal by buying a few small companies. Similarly, if you want access to 50 chief engineers and one patent, buying a company with 2,000 employees is not a cost-effective way to get those capabilities
Establishing a clear strategic intent is an important first step. From disrupting existing markets to creating digital opportunities to gain access to new customers, the potential targets are many and the range of potential targets widens. The question you need to ask is what types of deals accelerate the execution of corporate strategy. The answer usually focuses on four main ideas. Whether it is a product for a customer, access to unique technology or expertise, or access to an adjacent market. Some goals coincide with multiple strategic intentions. Whether it is access to a particular market or the provision of significant intellectual property (IP), the goal must be a central focus that supports the overall company strategy and guides choices.
In this scenario, the acquirer wants to expand or fill a gap in its products or services to generate revenue synergies in its existing division. The acquisition side hopes to strengthen the number of vendors used by customers, offer a more complete inventory of well-tested products and build deeper relationships with them Buyers already have access to channels, sales opportunities, and perhaps unique customers, making them “natural owners” of properties. Our research shows that this benefit leads to better growth and a better correlation with shareholder returns. On the one hand, Target has the opportunity to grow its business in a way that it could.
For example, when a global industrial equipment supplier wanted to expand its equipment inspection services, it acquired a company that manufactured its industrial 3D video analysis products even though Target was small and had few loyal early customers, and was gaining commercial momentum. The transaction combines proven tooling technology with a recognized acquired brand, global identity, and customer support that provides automated tooling control to the broadest range of customers across many industries that a startup can achieve.
The target in these situations is usually a small business that offers one or two services and has enough referral customers to justify the cost of those services and in some cases the company may not yet have a sales representative. Others have smaller sales forces still controlled by CEOs and other senior executives. In both cases, improved customer sales capabilities drive adoption of the targeted technology.
Buyers may be looking for specific technologies or intellectual property. This could be a digital analytics algorithm or methodology that complements in-house research and development, or it could be integrated into an existing product line Valuable trademarks and brands could be associated with the subject technology or patent. In this scenario, the buyer can help the startup gain immediate commercial appeal by improving its technology offering.
For example, consider a digital mapping company with advanced vehicular traffic analysis technology. The goal was focused on the public sector. The public sector can be slow to raise and sensitive to timing and election results, a potentially fatal combination for lean startups. When businesses run out of money large consumer-facing companies buy intellectual property rights at attractive prices and use the underlying algorithms and technology to power existing engines instead of selling them directly to governments improved. – A management platform with an already established clientele.
Buyers pursuing this strategy often lack commercial viability or scale in the assets they seek to acquire, must perform a thorough technical assessment (more on this below) and will also require large capital investments to make the technology available to customers. Retention of technology and intellectual property can also be a major challenge for lead developers and scientists.
Large consultancies abound around the world with digital startups and small businesses that have built strong teams but are struggling to grow revenue, perhaps due to time to market, high sales costs and outside investors. Acquiring such companies based on their talent is a time-honored way to rapidly expand digital opportunities. For example, when an online lending startup with a significant core engineering team lost a battle with a major financial services firm, a large investment bank “acquired” their roughly 20-person engineering product teams and upgraded them offered. I did that job. Your credit department. The bank has acquired a team with a record of technological advancement, management know-how and comfortable collaboration in a fraction of the time it took to systematically build into a transaction
Target companies may acquire useful intellectual property, but such deals are primarily driven by a talent acquisition strategy. Retaining key talent is the primary risk in this scenario, and any contract must be structured to encourage employees to stay with the company for at least two years.
Enter adjacent markets
Companies seeking to enter new markets may choose to purchase digital assets that leverage common talent, products, go-to-market strategies and targeted operating models. This approach typically results in an anchor acquisition with enough size and established footprint to match the buyer’s core business, which can be further expanded through the acquisition of additional assets if the buyer is already active in an adjacent category. To acquire a channeled property is to gain geographic presence.to strengthen your position by expanding. However, the established customer base may not meet the acquiring company’s objectives. If so, you may need to reassess your need to maintain that customer base (see sidebar, when to terminate a customer?).
For example, a large financial services company entered the neighborhood online car sales market by getting a digital platform for car owners. The company then built an online automotive research and analysis solution, followed by financing through transactions, adding used cars and repair services, resulting in an integrated online marketplace for car buyers
Given that different justifications require different approaches to targeting and evaluating potential acquisitions, management should ask itself: “How do these acquisitions contribute to our overall strategic goals?”