We are no longer an economy of products and services. As technology gains momentum, digitization is transforming the world. Companies are investing in acquisitions to embrace the digital change. Today, let’s talk about the most upcoming trend that has given a new shape to deals in the global M&A market. Digital disruption has become a new way of M&A deals, which is supposed to be quite unique and very different from traditional M&A.
Digital organisations are ruling the world, be it in terms of market cap, innovation or technology. Hence, in order to grow in this age of networks and platforms, every company must become digital. A new transformation has become necessary for leaving age-old business models and adopting new ones, hence leading to a trend for digital acquisitions. In a recent study by EY, M&A was seen as the most efficient way to acquire digital assets, capabilities and technologies to accelerate growth.
Stock market indices like S&P and Moody’s are now dominated by tech titans Apple, Alphabet, Microsoft, and Facebook. 2016 was a year of blockbuster deals in various industries like healthcare, consumer products, chemicals and others. But, not all deal were a part of the trading desks of Wall Street. Some large traditional companies bought small digital ones setting a new trend for traditional-on-digital deals.
2015 witnessed 48% more digital deals than 2011. This increase has been sourced from various sectors such as automotive, natural resource, and consumer goods companies. Also, traditional companies such as Siemens and General Electric have been the most active digital acquirers of hardware, software, IT service and internet companies. They set records for being the active pursuers in digital M&A.
According to reports by Ocean Tomo, a financial consultancy, 83% of the companies on S&P 500 in 1975, were the ones involving physical or tangible assets. As of early 2015, this number had fallen to a mere 16%. As per the data by Dealogic, digital deals accounted for about 32 percent of all global transactions in 2015 (Bain.com,2017). One of the best examples of this shift is marked by the biggest social media tech giant, FACEBOOK. The value of Facebook’s 1.7 billion monthly active users, is considered to be as valuable an asset as GM’s or GE’s physical assets. Assets (Anon, 2017).
How is new-age digital M&A different from traditional M&A?
- Digital acquisitions involve a longer list of target companies accompanied by a higher risk of expected returns, unlike a short list of target companies in non-digital deals.
- The shift from physical capital and services to intellectual and network capital represents the shift from traditional acquisitions to digital ones.
- The case with digital deals is quite different from traditional deals, that succeed through cost synergies. It is considered better to tread slowly in case of a digital deal.
Some of the mega deals that highlight digital acquisitions happened in the past are mentioned below:
- French bank Société Générale bought Fiduceo in 2015, hence expanding into the area of financial account aggregation.
- Axel Springer, publisher of Bild, one of Europe’s largest-circulation newspapers and a German media conglomerate, has acquired 25 digital properties in order to increase its presence in online classified ads and social media.
- Relx Group, the information and analytics company has not only bought dozens of information and software companies, but also disposed off its offline properties (http://usblogs.pwc.com/deals/ma-when-the-target-is-digital/).
Challenges of Digital Deal-making
Digital deals have become new enhancement deals for traditional companies. If a company uses similar mechanisms for making digital M&A deals as the conventional ones, it could potentially turn out to be a colossal mistake. Hence, acquirers with less experience in the digital world, face more obstacles in such deals. Therefore, digital M&A poses challenges for companies at every phase.
From the complexity of the identification stage to the tedious valuation stage that involves an appraisal process of the deal, digital deals are a tough call for various traditional companies.
I think the problem arises when traditional companies acquire the digital ones. Interconnecting different technologies as well as being cautious of the walk away price of a deal is important for dealmakers. Deal integration is the most important decision for a traditional-on-digital M&A (Forbes, 2017).
The main crux is that before an offer is made for such a deal, all professionals of the acquiring company, including information technology, human resources and line managers must be an essential part of the deal-integration plan and its implementation.
For successful deals in such a complex structure, companies should opt for the post-deal operating model that works best for them, depending on their identity and the unique circumstances of the acquired asset.
In order to compete in the virtual and non-material world, characterized by virtual reality and augmented reality, it has become important for organisations to adapt to the digital change. In the present scenario, I feel every company needs to become a digital firm leveraging intangibles, virtual networks and technology platforms.