April 22, 2016
By J. Neely, Strategy& Principal specializing in mergers and restructurings
Last year represented a record for M&A transactions globally, with blockbuster deals in healthcare, consumer products, chemicals, and many other industries. But some of the most interesting acquisitions didn’t get air time and weren’t a topic of discussion on Wall Street trading desks. These largely under-the-radar deals involved traditional companies buying small digital companies. While these deals didn’t make news in many cases, they have lots of strategic potential.
Just how common have traditional-on-digital deals become? Globally, there were upwards of 6,000 such deals between 2011 and 2015, according to an analysis by Strategy&, PwC’s strategy consulting arm. And the momentum is building. Non-digital companies completed 48% more digital deals in 2015 than they did in 2011, with particularly big increases by automotive, natural resource, and consumer goods companies. Indeed, some traditional companies have become such active pursuers of hardware, software, IT service and Internet companies that they can fairly be described as serial digital acquirers.
With traditional companies investing more and more resources in these deals and seeing them as a crucial to their future competitiveness, I and two of my European colleagues—Joerg Krings and Olaf Acker—took some time recently to identify the fundamental principles of success in digital M&A. In early March, in an article called “Will You Be Mine in the Digital World?” on the Strategy+Business website, we advised traditional companies on what is different about digital M&A and how they need to adjust. Here, in a nutshell, is what we said:
- Identify and make judgments on a wider group of targets. In non-digital deals, there is usually a short list of target companies. The list is generally longer in digital M&A, and the risk of picking something that may not pan out substantially higher. Be ready to put in place a whole new set of screening tactics.
- Set aside the guidebook when it comes to valuation. Compared with a drug that is already on the market, a consumer product that is already selling briskly, or any asset that comes with a cash flow, digital assets can be hard to value. You have to take a little bit of a leap of faith in some situations. But don’t be foolish about it. Heading into every deal, you should have a sense of “the walkaway”—the price at which the deal no longer makes sense.
- Think of non-conventional ways to retain talent. Money talks, but so do a lot of other things. Traditional companies sometimes put too much stock in earn-out clauses. Try also to identify what a uniquely talented technologist might be able to achieve by sticking with you. What looks like a strange bedfellow initially might turn out to be a great long-term partner.
- Forget what you’ve learned about deal integration. Traditional deals can sometimes succeed strictly through cost synergies. That’s almost never the case with a digital deal, and it can be dangerous to think otherwise. Pushing change in a seemingly small area relating to costs, after one of these deals closes, can backfire in ways too numerous to count. As in a lot of situations in life, it makes sense to tread lightly.
J. Neely is a leading practitioner in M&A transformation with Strategy&. He is a principal with PwC US based in Cleveland. His specialty is mergers and restructurings in consumer products and industrial sectors.