Tech companies increasingly turning to M&A to fuel their growth
With technology nowadays at the heart of digital business models, client centricity and innovation, technology companies are increasingly turning to inorganic growth to accelerate their growth strategy and capabilities.
The number of tech companies that have made acquisitions was at an all-time high in the first quarter of this year, according to a report by Forrester. Meanwhile, average deal values have been growing steadily over the past years, illustrating the climbing valuations attached to technology businesses.
To build the blocks of digital M&A it is essential to develop a strategy across the deal life cycle, from conception and planning through to the transaction and integration phases.
Based on experiences gained with both pre-deal and post-deal processes in the technology landscape, here are a number of best practices to consider:
Strategic fit: The first step is to evaluate if the target is aligned with company's overall strategy and goals for the future. The acquirer needs to take time to truly understand who they have acquired, who are their customers, how they interact with the product offerings and what aspects of the target needs to be preserved before they integrate.
Due diligence: The process of developing an integration approach begins with due diligence. Executives from the parent company and the acquiring company should collaborate to decide which functions should be integrated and which should be kept separate. Look into all kinds of different synergies, as well as more long-term factors such as innovation potential. In particular with tech acquisitions, a technology due diligence is an essential step in the process.
IT backbone: IT is a key lever of any digital deal and lays a foundation for operational savings where value can be captured. Examples of value include enhancing the efficiency and effectiveness of IT infrastructure, IT procurement and IT headcount.
R&D integration: The integration of research & development cannot be overlooked even though it is complex, and involves high risk and has longer synergy realisation paths than other functions.
Disruptive synergies: Markets are being transformed by new technology, which could require a new set of metrics to determine the importance of digital assets to a buyer’s company. It is important to not only consider what the target brings to the table on its own, but also the synergies that can be created by integrating it within an established ecosystem.
Cybersecurity: One of the main risks with tech acquisitions is that of cyberattacks. A weak cybersecurity strategy can impede the acquisition process, including diminishing profits, market value, market share and brand reputation.
Benefits management: Most digital acquisitions are small, so acquired digital assets can languish alongside other products in an acquirer’s portfolio. This runs the risk of revenue synergies going unused or being obsolete after sitting too long. Having a benefits realisation and management strategy in place is crucial for deriving maximum value from the transaction.
People and retention: As with any integration, ensuring that people are committed to the changes following the integration is a key factor for the deal’s overall success. In particular talent retention cannot be overlooked. In every industry, moving fast after an acquisition is difficult, but in digital – where technology advances at such a rapid pace – failing to keep key people on board can be catastrophic.
A case study: Accenture
Global IT consulting firm Accenture is one of the world’s top acquirers of companies. Since the start of this year, the firm has made 15 plus acquisitions, broadly falling into three areas: cloud, geographical expansion and enhancing services in its talent & organization / human potential wing.
Having already spent $1.1 billion to make a total of 19 acquisitions between September 2020 and February 2021, Accenture has earmarked another $900 million towards acquisitions till August 2021. They've clearly invested to ensure that they’re more than capable of assisting organizations all around the globe in their digital transitions and cloud migrations. They’re focusing on cloud-based services for enterprises, big data, and cyber security.
In the consulting arena, Accenture is clearly a trend setter and has used its buy-and-build strategy to expands its portfolio in in-demand segments, improve its delivery efficiency, and extend its presence across the globe.
Conclusion
To endure the latest wave of digital revolution, tech businesses often turn to mergers and acquisitions. The main strategic drivers for tech acquisitions are: acquiring technology / digital capabilities, sector convergence, consolidation to increase the market share, and accessibility to new markets.
Companies that leverage a proven digital M&A framework are well positioned to maximise the return from the deals and offer superior shareholder returns.
An article by Debasish Sarkar, a Director in the M&A Technology team of Deloitte in India. The views expressed in the article are on personal title, and not necessarily those of his employer.
