Technology-driven disruption is changing the role of M&A




This week’s post comes from Steve Ivermee, Managing Partner, UKI Transaction Advisory Services at EY.

The disruptive impact of technology continued to play a huge role in the business world in 2017. Looking ahead to 2018, what role will M&A has to play in both grasping the opportunities this change creates, and managing the risks presented by technology led disruption?

This was the theme that I had the opportunity to discuss with a host of businesses and EY colleagues at the EY Deals Forum at the beginning of January. In a day full of rich debate three questions stood out for me.

Is the impact and speed of technological disruption over or understated?  

Almost three-quarters of respondents to our most recent Capital Confidence Barometer (CCB) survey said that digital has had a “substantial or transformative effect” on their business operations and processes and two-thirds said it was having an equally strong impact on their relationships with customers.

There are perhaps a couple of ways to look at how businesses perceive the impact and speed of technological disruption. The first is to look at the pace of change in society and business over time. This pace of change is accelerating, for the simple reason that more advanced societies have the ability to progress at a faster rate than less advanced societies.

The second way to look at this is to ask how do we tend to perceive this rate of change. I think it is probably human nature to think of the world developing in linear terms, extrapolating our historical experience. And I think this means people may be under-estimating how quickly things are changing. If this is true, then the danger is businesses might be underestimating the speed and impact of technological disruption.

What is the role of transactions in mitigating against the risks and capturing value from this changing world?

These words represent the ends of the spectrum for deal rationale – one extreme is a defensive risk mitigation strategy, while the other is a digital growth agenda.

The latest EY Digital Deal Economy Study shows that 90% of respondents are considering digital in their capital allocation planning over the next two years and  74% of executives are looking outside their own companies for digital growth.

‘Acquiring innovation’ is also cited as the biggest strategic acquisition driver for UK companies according to the latest CCB. This is a big shift in outlook for deal rationale, and is likely to result in transactions between very different types of organisations. Considering this dynamic, we see significant changes in organisations’ approaches to M&A.

For example, we also see a great leap in non-tech companies transacting with technology companies – which is a trend we expect to accelerate as sectors continue to converge, customers change their needs, and technological change marches onwards. In a world where different sectors and different organisations bring diverse capabilities to the table, joint ventures and strategic alliances are becoming more commonplace to share risks and rewards.

The future is uncertain, and transactions away from a business’ core area typically bring even greater uncertainty. A risk sharing deal structure is one approach for a cautious acquirer; another is simply to deploy less capital into each deal but possibly invest in several different businesses to increase the chances of success – a small number of “bets”, for want of a better phrase.

These questions may somewhat explain the rise in corporate venture capital investments – or CVCs – currently being used by 68% of UK companies responding to our survey. The primary reasons for using CVCs is access to new capabilities and technologies and a faster route to market.  Now CVCs aren’t the only model to acquire innovation, but our survey shows that there’s certainly a strong desire to engage with start-ups.

Successful companies will not be those that take a ‘wait and see approach’, but those that are being proactive in addressing the key issues that are driving rapid change in their industries.

How is the execution of M&A changing?

As well as doing different types of deals with different types of organisations, deals are being executed differently.

When I started my career back in the mists of time, a data room was literally a physical room filled with hard copy documents that you couldn’t actually copy. Of course, those days are long gone. The volume of data is exponentially greater, and comes in a diverse range of formats. But deal timetables haven’t really changed so a critical diligence success factor is the ability to assimilate this data quickly and to draw out underlying trends and conclusions. This requires technology rather than just increasing the size of the diligence team.

The latest EY Digital Deal Economy Study shows that 46% of executives say their M&A due diligence processes are not “highly effective” for digital acquisitions

Another trend is an increasing focus on cyber risk. Recent attacks, like the Wannacry attack that affected 400,000 computers globally, have led to increased demand for the specialist skills that can help determine cyber risks and their impact on a transaction.

The third area where we are seeing major change is in the area of integration. Bringing different businesses together has always been a complicated exercise, but with deal counter-parties being increasingly diverse and often of very different scale this topic has gained in importance.

The latest EY Digital Deal Economy Study shows that only 24% of companies are highly confident about their ability to retain talent following an acquisition 

Clearly, the scale of transformation required – and the constant need to adapt – will require all of us to take a different view. Digital should be a key component of capital allocation, linked to finding the best combination of organic investment, strategic M&A and JVs and alliances. The speed with which we all need to act is different today, and one thing is certain — doing nothing is no longer an option for companies in any industry.