Based on analysis of Thomson Reuters M&A Database, c.20% of the deals appear to be in Digital domain or have digital motive. More interestingly, digital companies are being sold for record high values and continue to get traction. Recent acquisition of Careem (3.1B USD) and Souq.com (0.58B USD) are good examples of those in the Middle East market.
But, how is it different?
I would like to touch upon aspects of the M&A process including target screening, synergies identification, development of compelling proposition, deal financing and integration options.
Identifying Digital targets
Traditionally target screening process includes evaluation of the transitional data sets related to financial performance.
By including nontraditional data set may provide a value-added indication of the future performance. Such data may provide insight into the pace at which target organization is acquiring new customers, highlight effectiveness of the digital marketing campaigns. Social media analysis may provide insight into target segments by examining followers’ profiles. Sentiment analysis plays important role in getting cues about quality of offered products and services and overall customer service perception. More advanced network analysis may shed light on the organization’s ability to get traction in the market and identify key influencing partners.
Identifying opportunity to leverage Digital target
Traditional acquisitions are based on aspiration to achieve cost and revenue-based synergies. Typically cost synergies are driven by consolidation and most recognized revenue synergy is an ability to cross-sell. When looking for the revenue synergies in digital acquisitions buyer may decide to leverage target’s digital capabilities and subject matter knowledge. It may be anything from experience in digital marketing, product development to customer analytics. Additionally, key input into the cross-sell synergy might be an insight into the digital customers’ needs and wants.
In my view, it is also important to evaluate alternative scenarios and assess impact. For instance, what-if competitor decides to acquire the target.
Conviction and differentiated offer
Traditional deals take significant time to negotiate and progress with sales purchase agreement. Digital acquisitions often tough due to highly competitive nature and executed in fast phase.
Preparations require development compelling proposition that addresses stakeholders (buyer and seller) objective and identification of the key terms. Buyer may want to secure commitment from the target to realize synergies. Relevant price adjustments and earn-outs may serve as good incentive to differentiate offer and motivate seller.
Digital targets tend to be expensive, acquirers are limited in their ability to finance the deal. Financing deal solely on stock may not be an option and financing it with 100% cash may expose the company and lead to future write-offs. Other potential ﬁnancing solutions may include payment terms such as earn-outs or other deferred payment mechanism.
Integration of the Digital asset into traditional business model might be a challenging task. Often successful Digital organization have agile mindset and defer from rigid control and policy-driven attitude of traditional corporates.
Understanding the cultural aspects of the organizations is crucial for integration success. Organization may exercise different transition and integration mechanisms. For example, by exploring federated approach (when certain capabilities are replaced by acquired organization and it is allowed to retain certain flexibility). Other scenarios may include semi-commercial relations with target. In this case, acquired organization treats buyer organization as a customer and provides agreed set of services based on predefined service level.
Decision behind the integration options and scenarios require adoption of holistic approach to the operating model design.