Time to embrace the digital M & A mindset
The mergers and acquisitions (M & A) outlook in 2018 looks robust with global corporates seeing deals as a significant opportunity for growth this year, writes Mark Day, Corporate Finance director at EY, East of England.
We’ve just experienced the biggest first half for global deals on record. Meanwhile, in the UK, deal values in H1 2018 were only surpassed by H1 2007.
There is a heightened appetite to do deals in the next 12 months among global executives looking to acquire, with digital transformation remaining a core driver of M & A.
In our Digital Deal Economy survey of more than 900 executives, 90 per cent are elevating digital priorities in their strategic planning over the next two years.
The drive toward a digital future will likely see more innovative start-ups and nimble tech-enabled businesses targeted, with companies continuing to reshape themselves and acquire technology and digital assets that will help define their future.
Tech-smart deals will help companies future-proof their operations and address continuously changing business models. Companies are proactively finding solutions to regulatory challenges to help ensure deals are done – standing still from an M & A perspective is no longer an option.
Companies that do no more than put digital wrappers around their existing brands and propositions may find their future under threat. Digital disruption requires asking hard questions about what your organisation is today and what it needs to be tomorrow. The ability to continually innovate quickly is critical.
Forging a successful digital future will likely mean buying as well as building capabilities in-house. Today, investors are prepared to reward companies that make bold technology and transformational acquisitions.
Digital M & A is defined by the key process and new ways in which digital capabilities are built through M & A.
In the future, those who can execute digital M & A over a sustained period will have a competitive advantage.
However, we find clear differences between companies in their ability to transform strategic thinking into digital M & A capabilities and outcomes. There is great variance between those who embrace the opportunities of digital transformation, who lead at digital M & A, and those who are still learning.
There are three levels of digital maturity: leaders, adopters and aspirers. Only 14 per cent of respondents from EY’s survey are ‘leaders’ with robust digital M & A capabilities; 57 per cent are ‘aspirers’ and 29 per cent are ‘adopters’.
To succeed in the new digital world is not just a one-off sprint. It is a continuous race to stay ahead of changing customer demands amid ever morphing landscapes. Becoming leaders in the transformational age requires a digital-centric approach to capital strategy, dealmaking and processes.
On the basis of our research, there are four priority areas across the transaction lifecycle, where organisations should focus efforts to transform to become leaders:
Strategy and ecosystem
Establishing the digital ecosystem to fast track innovation, allocate resources and build capabilities will be critical to realise the potential of your vision. Understanding the evolving external environment and aligning strategic digital goals is the primary driver of success.
Acquisitions are clearly an important part of the mix – three quarters (74 per cent) of survey respondents are looking outside their own company for digital growth.
Also, leaders in our survey are more likely to have the CEO as the person driving the primary aspects of digital transformation strategy. That highest-level sponsorship is critical, but it is also paramount that this vision and strategy is embraced throughout the company.
Capital and portfolio review
Continuously reviewing the business portfolio to sustain ambitious acquisition and investment goals is key to future-proofing your business. Our survey respondents clearly understand there is a cost associated with digital transformation.
The vast majority of respondents (90 per cent) are considering digital priorities in their capital allocation planning over the next two years.
There is a clear recognition that capital is needed to enable the company’s buy or build strategy, however only 48 per cent agreed that they have a coherent and aligned buy and build approach to digital.
Rebooting M & A capabilities and processes to meet the specific deal demands of the digital environment is fundamental to success. When it comes to the deal process, more than half of all companies (54 per cent) believe their diligence in acquiring digital assets is highly effective, with a further 45 per cent citing their effectiveness as “moderate”. A mere fraction (one per cent) say their diligence is ineffective. This would suggest an overall level of confidence around the processes companies are using to evaluate targets.
Realising maximum value requires strategic integration approaches tailored to digital transactions. Many organisations lack the performance measures to understand whether they are succeeding with critical post-merger integration considerations.
For example, just a third (34 per cent) of organisations have KPIs in place to measure people or culture success, such as levels of organisational engagement.
Companies may have a number of digital targets in their sights at the same time, so the ability to integrate multiple digital assets at multiple speeds simultaneously will be key to delivering value.
How you manage your capital agenda today will define your competitive position tomorrow. EY works with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets.
Whether you’re preserving, optimising, raising or investing capital, EY’s Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice.
We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.