Drawing a digital dividend from M&A 

The chance to jumpstart digital transformation is an increasingly common M&A deal driver, but it is not always the short cut it promises to be.

2023 was far from being a bumper year for global merger and acquisition (M&A) activity. Rising interest rates, slowing growth, and headwinds such as geopolitical tension all hit M&A volumes for the year, with the value of deals falling by around 30%. But M&A in technology, media and telecoms (TMT) outpaced dealmaking in all other sectors. From Cisco Systems’ $30bn acquisition of Splunk to a myriad of smaller deals, TMT M&A continued to flow, accounting for almost one-fifth of all global dealmaking.

In a marketplace where businesses recognize the imperative to embrace digital transformation, M&A activity can offer a tempting shortcut to technology renewal and innovation. Acquiring a target that already has in place the technology and the digitally enabled business model to which the acquiring organization aspires may enable the latter to leapfrog some of the hard work required for internal transformation. Indeed, recent research suggests digital transformation is now a deal driver in almost two-thirds of M&A transactions.

That, at least, is the theory. In practice, achieving digital transformation through M&A is rarely straightforward. The history of dealmaking is littered with transactions that failed to deliver the hoped-for value – and digital transformation is a particularly challenging objective. Making a success of such deals requires a great deal of hard work at every stage of the M&A process.

A sensible strategy and realistic targets

The first challenge, often overlooked, is to set clear objectives for an M&A strategy focused on digital transformation. Some organizations are simply looking to acquire access to technologies in areas where they feel they currently have gaps; others are hoping to achieve more radical change – potentially even a strategic pivot. Either way, without clarity of objectives, dealmakers will have difficulty knowing where to start.

Nevertheless, M&A can catalyze an organization’s digital transformation ambitions. For example, a deal might enable the business to acquire innovative technology, perhaps from start-ups and scale-ups that have already done the development work. Equally, it could provide access to talented employees with digital expertise, helping the acquirer to expand its internal capabilities.

M&A can also create opportunities to use digital technologies to streamline and integrate business processes. And technology-focused M&A may facilitate entry to a new sector or market, or allow the business to reimagine its value proposition.

Only by setting priorities can M&A-focused businesses successfully identify suitable acquisition targets. Business leaders should work closely with internal M&A specialists – and external advisers – to build a shortlist of targets aligned with the business’s strategic transformation goals.