Making the Most of M&A in a Digitally-Driven World

Lately, we’ve seen double-digit growth from nimble, digitally-minded companies – and large incumbents are feeling significant pressure. Traditional companies are fighting hard to regain their position of power. And in doing so, many are realizing that organic growth won’t always give them the capabilities, talent and edge they need to compete with today’s fastest-growing brands.

That’s where M&A comes into play. M&A activity in North America and Europe is on a rapid rise as companies race to build their digital strength – in fact, last year saw $2.93 trillion worth of M&A deals across the two continents. As the M&A market heats up, we’re seeing a major trend toward large companies scooping up smaller, more digitally-driven companies to boost their own capabilities, which, if done right, has the potential to take growth from stalling to skyrocketing.

Digital is driving both buying and partnering

As digital upstarts begin to take up more market share, legacy brands are completely changing the way they approach M&A. And the reasons behind their decisions to acquire are rapidly changing, too. Accenture Strategy research shows that acquiring new capabilities (43 percent) and the need for next-gen technologies (42 percent) have quickly become on par with traditional triggers such as expanding into new industries (42 percent) or geographic markets (42 percent).

These digital investments are paying off: Many companies are seeing dramatic return on investment. Take the industrial conglomerate Siemens for example, their investments in software companies since 2007 to help fulfill its digital strategy globally total more than $10 billion. Then in fiscal 2016, Siemens’ digital business generated around $4.6 billion, 12 percent more than the prior year—with double digit growth predicted through 2020.

But buying isn’t the only option. Some companies are partnering with organizations in different industries, or with different specialties, to take advantage of new digital capabilities and dramatically enhance their value to customers. Take major players in the consumer goods space. One company partnered with an augmented reality organization for beauty brands so that its consumers can visualize face enhancements. Another large consumer goods manufacturer joined up with a tech-based company to gain access to digital vision tools that allow it to observe activity in stores around its products. With these types of partnerships, companies can get the digital edge they need without having to go through the more arduous process of integrating with a new organization.

Why digital requires a mindset shift

Whether companies are buying or partnering, digital deals require entirely different thinking throughout the whole M&A process – from strategy to integration and beyond. Companies who can adapt to this new world of M&A by quickly gaining the necessary experience will come out on top and be better positioned for further digital investments. And companies are catching on: More than 60 percent of those surveyed by Accenture Strategy are already using a different pre-deal and evaluation teams for digital transactions than they are for traditional acquisition targets. Eighty-four percent also agree that the CIO should have a seat at the M&A table.

Companies going after digital deals also need to keep in mind that acquiring a digital company is just the first step – the key to gaining value lies in the integration of the two companies’ cultures. But our research finds that many companies aren’t extracting full value from their deals because they’re unable to successfully infuse the cultural DNA of new companies with the legacy business.

Almost two-thirds of corporations globally kept their digital acquisitions as standalone businesses – and this could be preventing them from reaping major rewards. By contrast, those that do integrate can capitalize on a wealth of newly combined talent and technologies to create stronger, more fluid operating models, boost digital strength business-wide, and introduce brand-new offerings that give them a vital edge.

Preparing for the digital future

To rise to the top in a new M&A environment – one that requires both a new mindset and an eye towards integration – companies need to take these important steps.

• Start with an explicit strategy that defines how digital will fit in. For example, is the goal to have digital products and services? Create digital wrap-arounds for enhanced experiences? Better leverage information for insights? Digitize elements of the value chain? Or, is it to create a disruptive play altogether?
• Refine the search process. Target ideas may come from research universities, patent searches, partners at venture capital firms and many other non-traditional channels. New technologies maybe highly specific, and not yet fully tested for viability. Small brands may be hyper-local. Finding these opportunities is not as simple as developing deals with other well-known large companies.
• Tailor approach to valuation. Traditional valuation models can break down because they weren’t built for digital assets, and competitors may be in a position to apply the capability more broadly. This can potentially force a fallback to strategic value, grounded in the vision for the broader play the organization is making. It can also indicate when partnering might be more appropriate—at least as a first step.
• Map the value in multiple plays. Stepping into an emerging space is rarely a one-and-done event. Instead, it usually requires stringing together multiple acquisitions into one coherent capability for the acquirer. Be strategic when mapping forays into emerging areas.
• Don’t underestimate the importance of the right human capital. Keeping entrepreneurial types engaged is key to successful M&A innovation. There is no one-size-fits-all approach that works, so look to tailor to fit aspirations and skillsets.

Getting your M&A deal right has always been important, and the digital deals landscape is no exception. Those who move quickly to boost their digital M&A capabilities – with an eye toward integrating the best of both companies’ talent and technologies – will be more likely to see their M&A activity result in real, lasting value for years to come.

J. Neely is managing director and Accenture Strategy Mergers & Acquisitions lead.