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Future-proofing business through disruptive M&A
The opportunity for innovation-led growth is resulting in disruptive mergers and acquisitions (M&A) not only internationally, but also in the Western Cape.
The M&A landscape is undergoing immense change driven by the increased pace of technological advances, a shift in consumer behaviour and convergence across different sectors. In 2017, nearly 60% of disruptive technology acquisitions were made by companies outside the technology sector. In the Western Cape – South Africa’s own Silicon Valley – disruptive M&A deals are addressing the threat of disruptive innovation in traditional consumer-led businesses and simultaneously enabling these companies to create the businesses of tomorrow.
As many organisations are not achieving their desired level of growth organically, they are looking to inorganic growth strategies, like M&A, to supplement their current growth strategies. M&A is increasingly being used in response to the disruption being experienced by these organisations, giving them an opportunity to future-proof their businesses.
M&A also provides a great opportunity for local companies to achieve innovation-led growth through a strategic, corporate venture capital vehicle. This is the view of Ryno Holm, Africa Senior Manager for Consulting: Strategy and M&A at Deloitte, who says that consumer-led companies are increasingly using M&A as a strategic expedient to growth.
“Companies are thinking differently about M&A. Disruptive M&A is about getting access to the strategic advantage more quickly and thinking innovatively about deals and how to tackle the growth agenda,” says Ryno, adding that many institutional companies are acquiring disruptive technologies or capabilities in an effort to create shareholder value through more agile business models.
What is the driving force behind the surge in disruptive M&A? Ryno says that the sharp increase in M&A deals is due to shifts in consumer behaviour. Consumers trust peer-to-peer advice from sites like TripAdvisor or Etsy more than they trust corporates. In many instances they value ‘access’ more than ‘ownership’. Organisations are driven to change their business models to deliver on these consumer needs and M&A allows them to access disruptive innovation and technologies such as digital, social, artificial intelligence, robotics and others to help them disrupt the environment they operate in today. “Advances in disruptive technology are lowering the barriers to entry and allowing non-traditional competitors to create new market offerings. They can now use direct consumer product channels and consumer data as the basis for competition, bypassing the traditional economies of scale and scope,” says Ryno. “Take fintech, for example, where one would expect investment to emanate naturally from financial services companies. Instead, 65% of M&A investment during 2015–16 came from the non-financial services sector. This is because fintech advances, like payment processing, have the potential to add value to a range of other sectors as they have the ability to reduce the cost of providing the complete service to the consumer.”
He adds that disruptive M&A can be used to create significant shareholder value and breakout growth for more traditional institutional organisations. “Disruptive M&A is the strategic choice for companies that need to bolt on an online or technology component that they lack.”
Ryno explains that in 2015 Unilever bought Dollar Shave Club, a direct-to-consumer razor business that delivers razors and other personal grooming products to consumers by mail, for R15 billion. Together with other low-cost online providers, Dollar Shave Club offered a cheap subscription model through outsourced production. Its direct-to-consumer social marketing campaign became a viral phenomenon, jump-starting sales and generating immediate brand recognition and credibility. In fact, the valuation was driven largely by Instagram likes.
“The value in companies like Dollar Shave Club is more in the consumer insight it provides than in the returns from product sales. This is the opportunity that Unilever leveraged through the deal,” says Ryno.
In another example, Walmart spent R235 billion to acquire a 77% stake in India-based Flipcart, allowing Cape Townbased media company Naspers to sell its stake for R32.37 billion. Additionally, Makro (owned by Walmart) has acquired a majority stake in delivery start-up WumDrop. This acquisition plans to decrease the customer
order-to-delivery time for customers located within a 20km range from three days to three hours. Disruptive M&A deals are further allowing retailers to offer value-added services, unlocking additional revenue streams. For example, Shoprite, a retail giant in South Africa, has partnered with Standard Bank, Google and tech company Celbux to launch a mobile money platform. This new service allows customers to deposit, withdraw or send money as well as buy groceries at all Shoprite stores. “Shoprite is essentially looking to create new customer offerings, seeing transactions occur from a new market it previously did not have access to.”
But what needs to happen to leverage disruptive M&A and capture innovation-led growth? Ryno believes it lies in the structuring and approach of disruptive M&A deals.
“One of the opportunities is for organ- M&A. Disruptive M&A is about getting access to the strategic advantage more quickly and thinking innovatively about deals and how to tackle the growth agenda,” says Ryno, adding that many institutional companies are acquiring disruptive technologies or capabilities in an effort to create shareholder value through more agile business models. What is the driving force behind the surge
in disruptive M&A? Ryno says that the sharp increase in M&A deals is due to shifts in consumer behaviour.
Consumers trust peer-to-peer advice from sites like TripAdvisor or Etsy more than they trust corporates. In many instances they value isations to develop corporate venturing as a core competency in an effort to uncover,
incubate and invest in new growth opportunities. This could lead to financial gains and spin-off opportunities that provide growth outside the normal core and adjacent areas.
“Companies could also consider collaboration with a range of partners such as innovation players and start-ups to establish cross-sector partnerships. This allows for the pooling of costs and skills and the exchange of ideas like the Launchlab platform in Stellenbosch,” says Marius Alberts, Deloitte Western Cape Regional Leader.
He adds that corporates can buy out innovative companies in an effort to access new technology and products, unlocking additional revenue streams.
“In today’s environment it will get increasingly difficult for organisations to stay ahead in the changing operating environment, unless they look for paths to disrupt themselves. Responding to this through strategic M&A acquisitions in the innovation and technology space is something that will no longer become a choice, but a must,” concludes Ryno.