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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.
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.
“Post-deal integration is often the most complicated aspect of M&A, particularly where the goal is digital transformation. A clear plan for integration, with pre-defined progress targets and key milestones is, therefore, essential.”
Once the organization has settled on a target and begins to work towards a deal, it will need to look at how the transaction will work from a technology perspective. This should take place early on in the diligence phase of the deal, so that any issues can be identified and considered.
One important aspect is how the technology transfer will take place. This is partly a question of deal structure. For example, there will be pros and cons to both a full merger and to a partnership approach. One recent IMD case study looks at how companies weigh up these options during M&A.
A basic technology issue to consider at diligence stage is the compatibility or otherwise of the two organizations’ IT infrastructures and how this will affect cost and speed of integration. Data analysis, focused on the data assets held by each organization, will also be valuable. The ability to pool data may be crucial to the long-term success of transformation projects.
Governance and security are also vital considerations. Acquirers will want to be confident that the advantages of the deal outweigh any vulnerabilities. Maintaining security and protecting sensitive information are non-negotiable facets of any deal.
Post-deal integration is often the most complicated aspect of M&A, particularly where the goal is digital transformation. A clear plan for integration, with pre-defined progress targets and key milestones is, therefore, essential. Dividing the integration into manageable phases can help minimize disruption, particularly to critical systems, but it’s important not to lose sight of transformation objectives.
Assembling an integration team comprising leaders and representatives from key business functions in both organizations will support rapid progress. However, to operate effectively, such teams require a mandate, as well as structures through which to communicate and operate effectively.
Part of that mandate should be to explore innovation. Even where the transformation goals of the project are clear, a cross-functional integration team may be able to identify new opportunities. A more experimental and innovative approach, built on collaboration and knowledge-sharing, can drive additional transformation benefits – both internally and in customer-facing areas.
“ Data considerations should be central to this integration work. How will data held on legacy systems be migrated to a single, unified IT infrastructure?”
Data considerations should be central to this integration work. How will data held on legacy systems be migrated to a single, unified IT infrastructure? Doing the data mapping, cleansing, and verification work upfront will bring accuracy and consistency – establishing a single source of truth – giving the new organization a strong foundation upon which to build a safe and secure digital transformation strategy.
This may also be an opportune moment in which to increase the organizations’ data science capabilities, adding new tools and talent into the mix. More advanced analytics techniques, for example, may extract deeper insight from the combined data assets of the two organizations, improving the speed and quality of decision-making in the new business structure.
It also makes sense to think ahead about what might go wrong during the M&A process, preparing responses so that they can be refined according to the nuances of the situation.
One common problem is a misalignment of stakeholders. Do the business’s leaders, its IT teams, and its various business units all share a vision of what the deal will achieve? Here, clear governance structures that keep everyone in the loop are important.
Similarly, where two organizations have different corporate cultures, IT integration may prove problematic, with repercussions for digital transformation. Open and honest communication is vital.
More practical issues include how the new organization will modernize legacy systems, dispose of redundant applications, and eliminate technical debt to create a more agile technology function.
Finally, it would be a mistake to overlook the potential of digital technologies to facilitate the M&A process itself – particularly at the crucial integration stage.
For example, advanced analytics tools, driven by machine learning (ML) and artificial intelligence (AI), can provide actionable insights at each stage of the integration process, enabling leaders to optimize costs and drive value. Data tools such as dashboards can provide a real-time view of progress on integration in key areas. Such visibility can make all the difference in terms of keeping integration work on-schedule and impactful.
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