The Unique Challenges of Digital M&As

integrationA growing number of companies are leveraging mergers and acquisitions to bolster their digital competitiveness. These market plays can often accelerate time to market and create new levels of differentiation. They also present several risks that are unfamiliar to traditionally managed companies, easily resulting in the loss of the very competitive advantage that inspired the deal.

Today, most companies have a collection of due diligence templates for evaluating the financial merits of a deal.  Few, however, have the comprehensive M&A playbook that identifies the right path to deliver the intended value in an economic and timely fashion.  This is particularly true for digital acquisitions where technology and culture are the core differentiators.  While a good digital M&A playbook covers several key topics, valuation and integration are of particular importance.

Getting the valuation right

Determining the right valuation for a digital acquisition is fraught with misleading and often conflicting information. Digital targets are frequently expensive, with multiples typically exceeding those of traditional deals. Valuation begins with a practical understanding of how the acquisition could transform the NewCo’s operating model, business performance and equity profile.  This should be tempered with the observable differences in process, culture and technology that create impediments to integration and operating synergy.

While synergies generally translate into cost savings from economies of scale and elimination of duplication, they can also include new revenue streams and adoption of the better processes, technologies or practices.  The impact on customer perception and the business ecosystem, such as value chain partners, are other important considerations in the valuation decision.

Getting the integration strategy right

Formulating the integration strategy starts during due diligence.  This analysis is much more detailed than that done to evaluate the deal, particularly in the areas of people, process, culture and technology. Understanding the “secret sauce” from the customer’s perspective and how it’s made is the basis for ensuring none of the key ingredients is lost in the integration.

Executives from both the parent and the acquisition should work in partnership to determine which functions to integrate and which should be left independent. A merger that boosts the company’s access to markets, products or customers may be better off with a modular integration, incorporating only those parts of the business that would yield compelling strategic gains. For other acquisitions, operating independently and only integrating at the financial reporting level is the best way to preserve deal value.  The ability to absorb change should always be a consideration for the integration strategy.  The following framework is a starting point for evaluating integration options:

Getting the valuation and integration strategy right are imperative but only part of the challenge of a digital acquisition.  A successful track record in harnessing traditional M&As is no guarantee of success in integrating a digital asset or in using it to accelerate a digital transformation. If your company’s M&A playbook is incomplete or isn’t tailored to digital acquisitions, or the company lacks the deal-making experience, then engage an experienced M&A advisory firm to acquire it.

Great digital opportunities are out there.  Finding them, valuing them and integrating them rapidly and effectively is the new competitive advantage.

Read more: Starting With End In Mind To Select Better M&A Targets And Improve Outcomes