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Build a strategic advantage in Digital M & A

Sar Malik
June 12th, 2020 · 4 min read

There’s an accelerating focus on speed-to-market and cloud solutions have paved the way for micro-acquisitions of digital players, notably SaaS (software-as-a-service) providers. This kind of behavior will become the norm as digital M&A plays out across many industries.

Here are the key strategic factors that leaders need to consider for effective integration and ensuring an accretive acquisition of early-stage targets.

Build a differentiated, well-segmented core business

Growth leaders differentiate based on a clear, customer-focused core business model. This can be defined, for instance, in a company’s pre-deal, pre-close and post-close activities. A company can also identify customers that are like-minded with its primary sales segment, and target them accordingly for an end-to-end perspective of impact through the transaction cycle.

Defining a primary business group is the foundation of a successful digital M&A strategy. Far to often, competitive pressures to close arise in a middle ground between the two main dimensions of an M&A strategy: the traditional definition of the deal, and the evolution of the target’s capabilities, and value-creation position.

Deal friction can lead to a series of unattractive opportunities for acquiring companies including the lack of commitment to close. In the e-commerce sector, for instance, is a very different player than the traditional definition of an acquirer, given its starting point, its unique selling propositions, and its ability to offer an omni-channel customer experience. Hence, it must take necessary precaution, an elongated compliance, and technical stack “code scrub” through its due diligence process. Most companies are not afforded this luxury and must move fast to execute on its primary goals.

Take a robust approach to integration

Many companies are moving to integrate by the same basic building blocks of online commerce, and that is a risk. The new normal is to have an adaptable solution offering (tech synergy) and a segmented value-creation and delivery group (such as customer success teams). This is more prevalent in scope deals (e.g., buying a SaaS product, operating an e-commerce front) than in scale deals (e.g., buying a customer or multi-faceted marketplace).

Technical synergies must be the first component to risk evaluation. Followed through by effective management approaches of sales teams and customer transition onboarding.

Mitigating risks from materializing in scale deals, where the value-creation and delivery capabilities may be critical to the success of the business, is paramount. It is equally more difficult to containerize (to identify and isolate) what encompasses the deal, and the risk of the integration will increase as the company takes a strong position of cultural migration.

Digital companies are often accustomed to a flexible and open culture. Scope deals entirely revolve around retaining talent with an understanding of how the product or service is built and delivered.

Use the deal thesis as a starting point

Understanding the full potential of a Digital M&A opportunity, and the role that the deal thesis plays in that vision, is not enough. You need to apply the acquisition framework to determine what is required to achieve material market impact and how the business will make the best use of the shared resources.

The deal thesis spells out how the business will achieve the value that is necessary to meet the overall objectives, such as sales targets, or accretive value measured by IRR (internal rate of return). It identifies the specific value-creation actions both parties will need to take to achieve the deal’s targets, and how the operating model can be implemented.

The deal thesis also informs the way a parent organization views its portfolio of businesses. This is the most critical part of the transaction, as it defines how the newly formed business division will operate and where it should focus. For example, the deal thesis could say “how the company will use its expertise in e-commerce to build new e-commerce platforms for the parent as a whole”.

Walmart (NYSE:WM) acquired for a transaction value of $3.3B in 2016. Three-years following, the teams were integrated to deliver strategic expertise for

Execute the deal very aggressively

The most successful acquirers in targeting this sector of digital business models are relentless in their pursuit of a framework that enables both parties to achieve operational objectives. Acquirers often insist on a high level of control and create a culture that can resist the temptation to run the newly formed division as a stand-alone entity. See note above on corporate culture integration risks.

They also manage to deliver the deal thesis in a very clear and focused manner, an end-to-end transactional process that needs to be executed with placements of founders in key management positions. Ensuring the the deal thesis is right the first time around, and setting the tone of expectations for teams on how the deal will operate is required to avoid negative friction.

Adapt the operating model

The operating model serves as a blueprint for the division. It lays out how the company designates and manages the critical operational resources, and how those decisions should be made and executed.

Digital players with a negative cash burn rate often expect ongoing subsidization of operations. It’s imperative to include a plan of profitability with sales enablement, if not entirely a turnaround strategy.

Adjusting existing tactics can be a challenging endeavor in a sector with technical complexity and growth uncertainty. Most companies recognize the need to be flexible in their operating model, but it is especially important for scale deals, where the business model is built from the ground up, and where cultural and historical biases may influence the decision-making process.

Take advantage of the right people

The biggest challenge where M&A leaders fail to recognize is that human beings are not accustomed to the same experiences. They’re not necessarily able to fix a broken machine into a well-oiled and functioning team. Leaders are more inclined to operate in a way that allows them to control practices under the same business conditions.

In a scale deal, the best way to ensure a successful outcome is to bring the right people on the job, train them for the job, and make them aware of the growth requirements and the need for change. When that happens, the best companies create a new approach for the division, and they operate it effectively.

Get in touch to learn how we can craft a digital assets M&A strategy for your firm with the right checks and balances for technical due diligence.

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