Exploring M&A value opportunities in adjacent industries
Today approximately 50% of acquired technology ventures are leveraged in adjacent industries. Although shareholders appear to embrace this development in their quest for value, several implications prevail in corporate development and M&A strategy.
Dynamics of industry convergence
Consumers find themselves in a great position today. More than ever are they likely to find products and services customized to their exact requirements, offered against a fair price point. To deliver on this promise, organizations need to continuously evaluate their value proposition to the customer and identify strategic assets to execute their business strategy. In the contemporary business environment this often implies that organizations are required to reshuffle assets across businesses and industries. This new economic paradigm has the benefit of higher asset utilization, produces new opportunities to the workforce, and stimulates innovation. Excellent evidence of industry convergence is apparent in M&A transaction data. Analysis by Deloitte (2016) indicates that today approximately 50% of acquired technology ventures are leveraged in adjacent industries. This constitutes the development of new classes of disruptive technology ventures like FinTech, InsurTech, LegalTech, HealthTech, and EdTech.
In an attempt to develop value propositions that resonate with increasingly demanding customers, organizations are transcending conventional industry boundaries. This new dynamic is the rewarding playground of ventures acting as industry disrupters. With a sharp focus on establishing growth momentum for their business, these ventures typically manage to effectively leverage partnerships and acquired assets as new building blocks to fuel their value proposition. Large organizations are often not in the position to act with similar speed and agility. They typically experience added complexity resulting from a significant asset base, resilient corporate cultures, and shareholder activism. Their challenge is to reposition and right-size their business through divestment of non-core assets and investment in strategic assets. However, similar to smaller and disruptive ventures, corporate development in larger organizations is now also about leveraging new assets instead of capitalizing on synergies. This benefits the business case for M&A as value creation opportunities are no longer limited to synergy realization only.
M&A Deal execution
Although the deal execution process and involved parties are to a great extend similar to conventional M&A transactions, the dynamic of executing cross-industry transactions has implications. The first important consideration is the creativity required in the deal sourcing process. Finding assets across industries requires a broader external perspective. In evaluating a target, it is essential to establish common ground on the ownership structure. With the ambition to mutually capitalize on assets and capabilities, the Joint Venture structure is gaining terrain over full acquisition for example. Although internally the organization might not be fully comfortable with the proposed ownership structure, it must be able to respond with speed in capturing opportunities when they arise. The next challenge is then to explain the rationale of an unconventional deal to its shareholders. For these reasons it is important to accept M&A execution as a dependency in corporate development programs. The involvement of a professional service partner at an early stage will benefit the structural approach, productiveness of the exercise, and credibility among internal sponsors and shareholders.
Technology industry – An example
The observations discussed in this article appear to be applied by the corporate development team of a leading global technology organization. Formerly leveraging M&A as a defensive strategy to retain market share during industry consolidation, it now acquires targets from a variety of industries to rapidly capitalize on market opportunities. The combination of shortened timelines and the limited availability of acquisition targets that meet the demand for specific capability, is however sometimes experienced as challenging.
However, the acquisition of unconventional assets is often well received by shareholders due to its opportunistic nature. The investment of excess capital in positive NPV projects with strategic fit to stimulate capital development is experienced as an indication of a superior growth opportunity prevailing on the back of a mature industry. The shareholders are in the position to diversify the assumed business risk at portfolio level.
In acquiring unconventional assets, the inability to demonstrate synergy advantages is secondary to the ability to leverage the asset for business growth. As a result, proof points have become more important than ever. Now the incentive for acquisition is obtaining technological capabilities to advance the value proposition, the organization is more focused on the deal rationale. By considering to render additional services, splitting assets, and developing joint ventures, the organization stimulates the acceptance of the asset across industries.
Do you want to know more on Industry Convergence? Please contact Daan Witteveen at +31 (0)88 2880236