Realizing the Value of Digital M&A

Recent developments have accelerated changes in our consumer behaviours and intensified our need to have everything at our fingertips from banking to health insurance filings and travel planning. We buy more and more products online, pay without cash at the local supermarket and video-call our doctor to get a prescription.

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Companies that were in the process of digitizing are now in overdrive. Those companies that were resisting the trend will miss out if they do not use this opportunity to embrace digital solutions to improve productivity and provide greater value to customers, whether direct to consumers or business-to-business. 

Built vs. Buy 

Building your own digital capabilities requires either in-house expertise to develop digital solutions or at least in-house expertise to coordinate service providers or contractors to do so. Often enough at the beginning of the process, businesses do not  know what solutions or add-ons are possible which makes the articulation of a precise scope of work and budgeting with the provider or new in-house team more than difficult. In practice, solutions are developed over time with a considerable amount of ideas, brainstorming, trial and error resulting in a lot of back and forth communication between the "old business" experts and the third-party provider.

Digital M&A can be one way to adapt valuable business models to the new normal in a rapid pace to remain competitive in a changing world. The acquisition of a mature digital platform avoids lengthy in-house development while significantly mitigating the risk of failure by choosing a product which either has already proven success in the market or is close to market entry. Even if it may have to be adjusted to the traditional business model the acquisition considerably reduces time to develop and market which brings about competitive advantage in the short term and cost saving in the long term.

Digital M&A Benefits

Besides providing this "quick route" to business model transformation, digital M&A provides additional benefits:

  • IP ownership: though ownership in IP rights to work products can also be agreed in service agreements with contractors, this usually applies only to the specific solution developed for a specific customer. The base product of the contractor is the basis for its economic success and can be licensed but not owned by a customer. When acquiring the entire business, obviously, the situation is different. Not only can full IP ownership be secured but, potentially, the use of the technology can also be restricted or even entirely taken off the market. 
  • Complementary Business Model: If not taken off the market, many digital solutions can be used in different industries with small adjustments. The acquisition originally initiated to stay on top of developments with the traditional business model may turn out to be an additional source of income through licensing or at some point lead to a reinvention of the original business. If combined with a thoughtful but innovative data strategy disrupted businesses can be entirely rethought and reinvented. 

Success Factors

Realizing the full value of digital M&A requires an understanding of the ways in which digital M&A is different to traditional M&A:

  • Digital Strategy: The best companies are extremely clear about how digital M&A will enable their strategy. Companies acquiring digital solutions need to start by understanding how digital has disrupted the value chain of their industry, where the competitive advantages lie today and could lie in the future. They would then need to determine the specific ways that M&A would help deliver on that unique strategy, whether it is enabling customer digital engagement, reshaping operations, or protecting against digital disrupters’ business models.
  • Due Diligence: Traditional due diligence revolves mostly on evaluating a target’s past business performance and current competitive position. In digital M&A, acquirers need to become more forward-looking, assessing the potential success of the business model under different scenarios. They should also evaluate how suited they would be to accelerate the development of the digital acquisition, how scalable the acquired assets are in terms of people, technology and business models, and whether there are any cultural risks that could destroy the digital assets very quickly. By making more of a 360 degree due diligence process, companies can avoid unpleasant surprises.
  • Integration: Integrating an acquired "new business" into an existing group which is usually much bigger and has historically grown compliance standards, internal procedures and policies without destroying the power of innovation must be done carefully. If the right balance is struck between integration for realization of synergies and a remaining level of independence, the acquisition will prove fruitful for both the existing group and the target business. As digital disruption intensifies, companies will increasingly consider M&A as a way to adapt. As is often the case in the digital world, companies who apply a learning-by-doing approach and implement a quick feedback loop on their early digital M&A deals, will be well positioned to deliver superior shareholder returns in the years ahead.

This article was produced as a collaboration between Bird & Bird and OXYGY.