Identifying the right deal
Understanding the M&A lifecycle
Signing the deal to buy or sell a company is often the most memorable moment for those involved in the transaction. But as crucial as this moment is, it is only one of the steps towards a successful M&A transaction. Considering an M&A transaction as a lifecycle and knowing how to respond to every step that came before and in anticipation of the next, is what makes the transaction successful. This article is all about the first step: identifying the right deal.
Buyers from various industries
Until recently, the majority of acquirers in TMT transactions were companies in the technology, media & telecom industry. However, since 2016 this has changed dramatically. About 60% of technology assets are acquired by businesses from other industries such as banking, automotive, and consumer business. The number of potential buyers has therefore risen dramatically, creating new dynamics in the M&A transaction.
Digital transformation and value creation
So what are these acquirers from outside the technology industry interested in? First of all, the current economy is characterised by digital transformation, with technology becoming an integral part of primary business processes. Second, companies are looking for ways to be more sustainable and/or keep up with customer needs to remain relevant. For instance, the business model of automotive companies used to be designing and selling cars. Now, they are moving towards ‘mobility-as-a-service’, for which ownership and means of transportation are no longer the main criteria – mobility itself has become the business. In fact, even companies that are digital by nature, such as Uber, are transforming their business based on the mobility service model, expanding their business from cabs to all kinds of transport, including bicycles.
New type of buyers
New concepts such as mobility-as-a-service, or new technologies such as the blockchain, are still very much in an early stage. Nobody knows exactly where these innovations are heading. The only way to become part of such a development is by making small steps, experimenting within your own company and becoming part of a larger ecosystem by buying, investing or building partnerships with e.g. technology ventures. When technologies are still in the early stages of the Gartner hype cycle (see below), it is advisable to acquire a non-controlling interest in a number of – relevant - technology ventures, each with their own approach. In fact, many corporates have set up their own corporate venturing capital fund to build a portfolio of non-controlling interests. Once the hype is over and it is clear which technologies and companies are the ‘winners’, corporates can still decide to buy the entire company to enhance further development. Further along the Gartner hype cycle, private equity parties will come into the picture. These parties can invest in a technology venture to accelerate its growth, or they can offer the owners the option of already cashing part of the company’s value and allowing the venture a stand-alone growth path – instead of becoming part of a corporate, which might slow down growth.
Identifying the right M&A target
Once you have decided to acquire a technology venture, it is crucial to identify the right target. Many buyers are focused on the strategic fit and the operational fit - which are important criteria, but there are more aspects to consider. Is there a cultural fit as well? Does the new business fit into your current KPIs for e.g. growth and profit? Will the transaction create actual synergy? What helps, is mapping what your competition is doing in the field of technology investments and M&As. This could be a strong indication of the edges of your future business. For instance, data analytics and semantic search are great tools to help you consider what your future direction can be. Of course they are only tools – professional insight is still needed to decide whether the selected technology venture is indeed the best choice, and when it’s the best time to make the deal.
The right price
And there’s more. Are the current owners open to a transaction? And are their expectations concerning the selling price realistic? For instance, once again referring to the Gartner hype cycle, the owners might still have expectations based on the hype phase. It might be worth waiting a little while longer before you decide to buy. Please read more about this topic in the pricing and offer episode of this sequel.
An appealing equity story
Finally, there’s the question of how to convince the current owners that you are the best buyer. Paying the full ask price is one option, but there are more. Technology ventures are often concerned that they will simply become a subdivision of a large corporate, which will prevent them from following their own instincts and growing their business. Successful M&A transactions are based on mutual respect and benefit. If you are a corporate, an appealing equity story about your strategy and why the technology company is such a perfect fit will help them have faith in the outcome – and help you stand out between the other interested acquirers. Or, when you are a private equity player, you should try to convince the owners that a stand-alone growth path is attractive and that the added value of an investor is much more than simply providing capital.
The M&A cycle in a nutshell
Below we have embedded a picture of the M&A lifecycle and a short description of each phase. In the coming months we will publish a series of articles on each step of the M&A lifecycle, sharing stories and thoughts about each of these phases of the M&A lifecycle to offer you insight in the entire process and help you benefit from the promised returns of a deal. In the lifecycle we will emphasise the integration of your steps and actions, and what might happen if you deal with every step in isolation.
Identify the Right Deal. Either through active selection of companies or business units, or by reacting to offers in the market (one-on-one or by auction). This phase involves setting corporate strategy, identifying growth areas or selling non-core activities.
Pricing and offer. Initial pricing of a company and assessing how easy or difficult integration or separation is going to be, as well as which legal and tax structure will be most suitable (and its impact on pricing).
Perform due diligence. What do we buy? It is crucial to assess the real value of the company, the presence of ‘skeletons in the closet’, financial aspects such as balance and cash flow as well as non-financial analyses (e.g. company culture, integrity, operational synergy benefits, and operational analysis of real estate).
Execution. After the due diligence phase, a Sales and Purchase Agreement is drafted, the relevant authorities are informed and consulted, and the ‘closing’ procedures are executed.
Deliver the Promised Returns. After the transaction has been completed, the expected results must be achieved – how to realise synergies and to prevent that in a future strategic re-assessment the new business will be considered as a non-core activity and be resold (without any added value).
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