M&A as a Service : THE Strategy in Digital World
I was reading about DAVOS few days back, an event which brings global political and business leaders together on a platform to envision and predict the future of our planet. ‘Mastering the Fourth Industrial Revolution’ was the theme of DAVOS, and leaders agree that we are witnessing economic changes of historic importance.
Digital transformation is reshaping the industry, society and every aspect of the human world. With progressing times, should we be focusing on revamping our offerings which has remained largely 2D (Vertical and Horizontal)? Should we add one more dimension more relevant to digital age — a New Machine Age Dimension or a 21st Century Dimension? Well, whatever you may call it, the fact is we have to generate Mainstream ‘3D Offerings’ to be relevant for a longer period in our markets. I thought about highlighting one serious trend with vast potential to play with.
Fig. 1: Global M&A Volume
We have seen a spate of mergers and acquisitions in the technology world in the recent months.
2015 became a record year with Global M&A volumes hitting an all-time high of over $5 trillion, an astonishing 40% rise from 2014 figures of $3.7 trillion.
With M&A activities 10–14% higher since the last crisis of 2008, global economic transactions are reaching a new normal. Deals are being transacted at higher multiples with share of $50b+ deals rising in total volume. GE’s 11b acquisition of Alstom Power/Grid & Danaher Corp’s 13.7b acquisition of Pall Corp are examples of rising deals for Portfolio alignment and fully integrated systems and offerings. Anheuser-Busch InBev’s $117b bid for rivals SABMiller and Pfizer’s $160b agreement to acquire Allergan go on to show the scale at which mergers are happening now. US$ 78b deal between Charter communication and Time Warner Cable reaffirm strategic importance of consolidating market capitalization and bolstering capabilities in the rising era of digital disruption. Rise in cross-border mergers is adding a new dimension in terms of strategy, diversity and complexities involved in traditional M&A processes.
Shell’s US$81.5 Bn purchase of UK Energy supplier BG demonstrate strategy to stabilize growth in globally volatile industries. Unlike jittery responses in the past, such deals are well received by both investors and governments today. In pursuit of higher value creation through synergies and with companies portraying higher transformative potentials, M&A has become an inevitable part for an effective growth strategy. Most of which are apparently driven by the pursuit of scale and growth but there are Micro trends which are making this phenomenon a permanence in 21st Century.
Geo distribution: Tracing the M&A activity
Gone are the days when M&A activity were largely concentrated in the western world. While the western companies are still investing heavily in China and other eastern markets, we see a new trend of reverse geo mergers emerging across the globe. A string of high profile acquisitions in all the sectors shows how companies across the globe are trying to become a part of every aspect of the ecosystem they play in.
They want to clearly climb the value chain from services to products, from commodities to IP and from being Chinese to being GLOBAL Power. ChemChina recently agreed to acquire Germany’s KraussMaffei in $1 Billion deal. Beijing Enterprises Holding has also reached an agreement to acquire German waste to energy firm EEW Energy from Waste (formerly E.ON Energy from Waste) for nearly €1.5 billion.
Gurgaon-based restaurant discovery platform Zomato’s acquisition spree around the world (nine acquisitions in the recent past including Urbanspoon, NexTable, MaplePOS) goes on to prove that companies in the eastern world, despite their current size and scale, are all set to foray into new geographies to expand their user base and leverage the local market experience.
On a closer inspection, 2015 M&A data presented all varieties of deals in terms of size, hostility, geography and industry verticals. It is needless to say that with such volumes of transactions, have to be backed by a holistic set of secure technologies and world class sharp services.
Various business parameters such as Time to Market of a merged entity has far bigger implications than a product launch, I think all of you would agree.
We are witnessing a Plethora of Unicorns trying to fill gaps in digital world or simply opening new market segments. Not all will survive, but those who would, will mostly likely profoundly disrupt the sector they operate in. Further more Activist Investors, Old Economy and New Economy Players are embarking on a journey to create their digital future.
Amidst fiercely competitive environments of today, companies are forced to further boost their capabilities, with the right technology and talent to sustain a strong growth over time. The purpose of M&As can range from merely acquiring assets of other companies to an outstanding technology with immense future potential.
M&A world is more like an Amoeba — it is too vibrant to have a definite shape and one cannot find a center of gravity, but some objectives are seemingly visible.
Mergers and Acquisitions -Digital Transformation Goals
An Era of Massive Convergence: The new economy companies are highly innovation-centric. Artificial Intelligence (AI), IoT, cloud computing and machine learning are posing life-threats to existing business models as well as life-time opportunities to expand business with new services. Gains are disproportionate when IP is applied across multiple sectors to solve bigger problems.
M&As are an attempt by old economy companies to regain their foothold in the ever-evolving technology landscape. Startups with their technology focus, but limited resources act as perfect candidates to be acquired in order to utilize their full potential. For example, Microsoft has recently acquired SwiftKey that predicts the next word a user is about to type, based on analysis of their writing style. Google earlier bought DeepMind for Machine Learning and Apple bought VocalIQ last year to step up its AI capabilities. With the startup ecosystem maturing rapidly, there’s a string of tech-focused startups being snapped up by Silicon Valley to catch up with emerging technology trends.
21st Century Talent: The role of traditionally defined capital, the financial or physical kind is completely different and less important than non-traditional capital like Human capital. There is enough liquidity in market but not necessarily Talent. Acquisition of Talent can be equally imp as is needed by many 20th century companies to adopt the Hygiene of 21st Century!
Digital and Additive Manufacturing: Digital Manufacturing simulates complete plant and manufacturing processes as Digital TWIN. Holy Grail of Digital Manufacturing is that a consumer can configure & order his own car directly to an OEM and not to be waiting with Distributors.
To bring down the cost of mass customization, you have to bring in Additive Manufacturing to be able to produce specialized low volume components with no extra costs. You cannot do this alone!
With substantial capital at their disposal, disruptive old economy companies are opting to take the M&A route to continue to leap-frog. You have so many options to integrate ready blocks to fulfill your strategy, so more BUY than MAKE!
Diversification: Old economy enterprises like Ford, Diamler, GE, etc. need to adapt to the newer business models to stay relevant. Top business houses are also seeking to diversify and increase their exposure to upcoming sectors. GE’s CEO Jeff Immelt recently said “I don’t really consider GE a software company per se. But we’re a company that needs to be based in software going forward.” GE has invested more than $1 billion on its Predix cloud platform, and is determined to go after business outside the GE group. Offering Digital Future to your clients is the best strategy to Exist with a Purpose!
Emerging class of FinTechs: A recent report by Deutsche Bank reveals that cashless payments grew by about 7% year-on-year or almost 5 billion transactions. Foreseeing that all future transactions would become cashless in the coming years, companies across sectors need to gear up to handle cashless transactions that typically include card payments and e-money payments. Revolutionized by such upcoming trends, the FinTech sector is witnessing significant M&A activity.
Portfolio with Digital Potential: Investors including Tech Savvy ones are focused on Valuations, rest is Verbatim! Digitization and technology trends are forcing them to overhaul their ways and parameters of analysis. Investment firms, Hedge Funds or its equivalents are re-evaluating targets by assessing their worth based on their digital potential. By assessing the potential of digital adoption in companies, they may rationalize their portfolio and prioritize risk-based investments. These investment firms want to ensure higher exposure to digital driven segments.
Troubled Economic Times: GDP growth across the world are below historical averages. Due to the restricted size of the domestic market in western world, businesses are forced to look outside home markets to scale up. Firms are on the lookout for markets like China where its products and services can be rolled out relatively faster. Many companies also resort to strategic buy-outs of local players to pace up the adoption in global markets. As the Skype co-founder Niklas Zennstrom rightly puts it — “We didn’t think about one market — the world is our market.”
Be the First and only Choice: Creativity is at its best and equal access to global resources ensures the World is flat for customers and suppliers alike. Smaller players can give tough competition to giants with their niche products. E.g. Kraft Beer Companies in USA grew much faster than Mass Beer companies in last 4 years. Hence you see almost 13 Kraft brands being acquired by giants like Heinenken etc.
So principle is simple — If you cannot Beat them, Buy them!
Understanding the M&A cycle
‘M&A as a Service’ Life Cycle Management
In this era of mergers and acquisitions, the tech world is morphing into digital platforms of tomorrow.
We are witnessing companies with similar and complementary nature of products and services coming together, but the real magic of disruption lies in integrating the right resources & knowledge capital in an appropriate business model to unlock unexpected Blue Oceans — and get valuations of Red Oceans!
But this requires an ecosystem of system integrators, technology providers and other partners to facilitate successful integration of any two organizations to evaluate & realize the consolidated potential of the merged entity. While some players might offer a full spread of services, others specialize in platform solutions or in F&A domain. There are enough consulting or rain-makers in the market, but there is much wider technology play potential to bring in Automation and Real Time Intelligence across Pre, In, and Post Merger stage of the cycle.
Global Technology players like HCL can aid in multiple ways from across the M&A lifecycle. Not only analyzing the master data but offer various front end services. A comprehensive back end digital platform can support all phases of Pre-merger, In-merger and Post-merger of an acquisition spree. With diverse and rich experience in Product and Service Lifecycle management across many industry verticals, we have necessary depth to provide end-to-end services which can be complementary to current prime M&A services providers like E&Y, PWC or Bankers who look at largely financial parameters. We can make this PROJECT a TRUE DATA DRIVEN, TRANSPARENT, AGILE, SECURE and most importantly much more Profitable!
‘M&A as a Service’ Life Cycle Management
Complete process can be run with fully compliant, Data driven systems like any other large program involving different agencies or their systems — Legal , Finance, Engineering , IT , Sales , Production, Bankers, VCs, Governments , Inspections etc. with a ‘Single Source of Truth’ any point of time.
M&A as a Service Model
M&A as a service might be an unthinkable offering today, but with M&As becoming a mainstream in pursuit of organizational growth, it is poised to revolutionize the industry in the coming years with a slew of game-changing offerings during different phases of M&A cycle:
Pre — Merger
Integrated Document Management & PLM: Archiving documents, agreements and transactions digitally throughout the due-diligence process will streamline the entire deal cycle. Accelerating the technology adoption will also ensure zero defect transition by enabling more accurate verification process with the help of digital technologies. Customizing services for old economy, new companies and startups will go a long way in executing all the steps involved in due diligence for M&A faster, thereby cutting down a lot of cost and other hassles.
BGV (Background Verification): It is important to conduct high-level due diligence background checks to validate the acquired company’s trustworthiness rather than relying on incomplete data or unreliable sources. M&A is an opportunity to correct inaccuracies in information about the company or its key executives to avert any business disputes in future. System integrators can offer background checks on companies, key executives and assets to facilitate informed decisions in the M&A process.
VDS (Virtual Data Services): System Integrators can initiate setup of Cloud-based data storage to ensure smooth flow of information facilitating merger & acquisition due diligence and accelerate data-driven decision making. Through dashboards and other reporting tools, real-time progress status can be tracked while ensuring transparency of workflows.
In — Merger
System Integration: With their technological expertise, system integrators can help the merging companies to integrate tools like product lifecycle management (PLM) and customer relationship management (CRM) across both organizations.
Streamlining Operations: With their wide exposure to engineering services, the service provider can also assist the merging companies in evaluating the savings from their merged supply chains and capture operational synergies to the fullest.
Portfolio rationalization: To prevent any cannibalization of sales in the merged entity post M&A, system integrator can assist the companies in their R&D portfolio management by determining complementary product lines and enable optimized integration. They can also help in identifying business areas that could deliver significantly better returns in future and reshaping existing service lines. This must lead to enhanced R&D productivity of the merged entity in the long run.
Track integration success: Various standard operational metrics can be used to further track the integration progress through dashboards to spot potential roadblocks to integration, discover and mitigate potential liabilities. This will enable faster decision-making and ultimately ensure that the deal value is realized.
Drive integration to completion: System integrators can further drive the integration process to completion through change management and other services.
Post — Merger
Prioritizing quick gains: System integrators can help ensure long-term sustainability of the merged portfolio without sabotaging company’s short-term performance. They can prioritize on low-hanging fruits of eliminating redundancies in processes and consolidating resources to reduce costs and maximize synergies between the organizations to gain early market trust.
Refining long-term bets: The system integrator would analyze the product development structures of both organizations and chart out a product development roadmap by optimizing the best practices from both organizations to focus on growth opportunities of tomorrow.
Benchmarking: Develop standard processes, tools, and benchmark systems that can be reused and will go on to become industry standards for managing integration of similar firms.
Estimating cost of digital integration could well differentiate between success and failure, but is often undermined in overall complex scenario of M&A. Many of the factors that drove M&A activity in 2015 continue to be present; let’s keep a keen eye on the M&A environment in 2016.
Well, we did not talk about how many of this M&As are really successful, but do we really care? Our worthy customers know the best! Or that can be a separate offerings segment about Post-Merger KPIs and Dashboard as many of the merger terms are actually dependent on post-merger performance.
In short, we can use our full force to revolutionize the services market with ‘M&A as a Service’!
- Dealogic website
- Capital Insights — Issue Q4 2015 — E&Y Advertising Feature
- Fortune Magazine
By Hirren Turakhia, Vice President, HCL Engineering and R&D Services
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