The New M&A and Private Equity Playbook: Digital Transformation

by Laura Merling and Tom Terry

We are in a “crossing the chasm” moment.

In Crossing the Chasm, author Geoffrey A. Moore focuses on the gap that derails technology startups- transitioning from one category of consumers to another; early adopters to the early majority. Our current global cross the chasm moment is not about startups. It is about traditional industries and corporations who have been struggling to meet the demands of their burgeoning consumer base, Millennials, and GenZ, before the global pandemic. Department stores to automotive manufacturers have dragged themselves into the 21st century with very little change to how they do business. They have not kept pace with their consumer base of digital natives. That is no longer an option. The pandemic is a disruptive force driving a major shift for all consumers, and all businesses. Digital disruption is here.

Companies that can meet the demands of this massive digital disruption, forced by the pandemic, and have a healthy balance sheet from capitalizing on the economic boom of the past ten years, will exit this crisis in pursuit of M&A opportunities. Others will choose this as the moment to take their company private and retrench on growth. In either case, we are on verge of reshaping the M&A and private equity playbook; shifting from cost-cutting to investment in innovation through digital transformation. The focus becomes reinvention and retooling. A recent quote from private equity firm Carlyle’s Co-CEO, Kewsong Lee, says it all — “Every deal is a tech deal.”

Digital transformation is the use of technology — software enabled, connected, transactions, and interactions, across all areas of a business. The goal of digital transformation is disrupting existing business models, improving customer experience, and creating operational efficiency.

M&A and private equity goals are changing. Investors are looking at transactions to drive the long-needed and now required digital transformation. Last year, the SunTrust and BB&T merger was the most noteworthy deal for those of us in the world of digital. Why? SunTrust’s CEO Bill Rogers announced the combined new entity will spend $100 million on technology and innovation. “We also believe in [a] digital-first mindset — remember we said we have a digital-first mindset. Everything else is important, everything else is in support, but we start from a digital [mindset] working backward.”

Under intense pressure to innovate, a merger or private equity deal is an opportunity to invest in the future of your company. It is an opportunity to create new value through investment in a digital transformation; focusing on business innovation driven by technology. Seize the moment. They don’t come very often.

The New M&A and Private Equity Playbook

Historian Alexander Field found that “the most technologically progressive decade” of the 20th century was the 1930s, during the Great Depression. In the financial crisis of 2008, when the U.S. GDP contracted by 2.8 percent year-over-year at the height of the Great Recession — and yet, in parallel in 2009, Americans started 550,000 new businesses — the highest rate in 14 years. This is not a time to hesitate. New market entrants, new business models, and industry convergence will make competition fierce in the months ahead. Now is the time to take the steps to move the business forward.

The two primary elements of the new M&A and Private Equity Playbook are the following:

• Digital Strategy: A multi-year digital strategy focused on driving customer experience, operational efficiency, and new revenue.
• Technology Modernization: Investment in the new technology and skills needed to transform the business.

Digital Strategy

Your digital strategy is your business strategy. Evaluation criteria for a merger will now include an assessment of the entities’ combined opportunity to capture market value using technology and automation. New revenue streams, customer experience, and operational efficiency will all be viewed from a digital lens. A leading private equity firm, The Carlyle Group, recently hired a Digital Operating Partner, unique in the industry and setting a new precedent in the expectations of the role of digital in the value creation.

Historically, digital was either an entity attached to IT or a separate entity with its own business goals usually driven by siloed projects. In the new model, every executive is accountable for digital. The digital strategy is the foundation for operating the business and delivering on business targets.

Technology Modernization

Technology modernization is critical to your ability to meet changing market demands. A recent case in point is the State of New Jersey. Over the past several weeks as the pandemic has impacted the workforce, the state like many others, has seen an inordinate number of claims for unemployment. Unfortunately, their back-office technology was implemented in the 1980s and never updated to support evolving demands. The technology debt created another challenge; the skills required to update the system no longer existed in the organization. The governor was driven to make a public announcement to find the skills.

Several years ago, industry experts noted that more than 50% of the synergies available from an M&A are related to IT; focused on cost reduction in duplicative technology investments. The new playbook will no longer look at technology as a place for cost savings or synergy targets. Technology will be the lever to drive revenue creation. Technology will be at the forefront of the investment thesis.

Moving Forward

Disruption is upon us. During the months and years ahead, we will see profound changes to every business; all driven by technology. M&A and private equity will be no different. The new playbook for M&A and private equity value creation will be driven by investment in digital transformation.

If you would like to learn more about the new M&A and Private Equity Playbook, reach out to us here at Slalom Strategy (strategy@slalom.com).