- Digital technologies increase M&A deal speed, as well as foster new M&A-related business models previously not possible.
- For a billion-dollar revenue business sold at median industry EBITDA multiple, applying digital technologies to a merger or acquisition could bring value of $15 to $30 million for the buyer and $15 to $45 million for the seller.
- Companies should act now to apply Blockchain, Artificial Intelligence (AI), bridge services and more in their M&A approach, as deals become increasingly digital and require shorter sign-to-close timelines.
In all M&A deals—but particularly in those involving at least one highly digital party—deal teams should be thinking beyond traditional closing models.
Gains erode quickly if companies cannot reap the benefits of the merger or acquisition in short order. Digital is the only tool at their disposal that can deliver within the accelerated timeframe today’s rapid business pace demands.
How digital can energize your M&A
No more lengthy TSAs. We expect Transitional Service Agreements (TSAs) between a buyer and a seller will be a relic three to five years from now because of digital technologies. While TSAs ensure business continuity for the buyer, they also delay synergies, create higher operational costs—as TSAs generally have markups anywhere from 5 to 20 percent—limit buyer flexibility and increase dependency on the seller.
Bridge services fill the gap. Companies no longer must rely on their own in-house IT or other capabilities to close a deal; a digitally savvy third party can help the acquisition for as long as necessary. For example, one company leveraged third-party driven lean distribution across key markets to make an asset more attractive to private equity buyers. The buyer was willing to pay a higher price than the seller’s best-case internal analysis because having the distribution handled allowed it to focus on growth rather than TSA exit plans. The seller extracted approximately $80 million more in price than their internal valuation analysis indicated was feasible.
Digital becomes a capability with impact. Nine out of 10 executives agree that to be successful, companies must develop new M&A capabilities—specifically those that help them choose when to buy, partner, invest or incubate as they execute digital business models. An increasing number of companies are executing string-of-pearls acquisitions, where they buy a number of smaller companies to give them digital prowess in a specific area. In these types of deals, innovative closing models are key to business continuity and sustainability.
How to begin digitizing your M&A
Frame buyer responsibilities early. Start to define buyer responsibilities for Day 1 as early as the due diligence phase—even earlier if possible. In tandem, develop a TSA blacklist that breaks down the services essential to close the deal versus those that are off limits. Don’t let your organization’s current capabilities limit the possibilities.
Embrace the ecosystem, which will be partially tied to M&A value. No one player will be able to provide the full capabilities business model transformation requires. Because of this fact, companies will need to agree on closing models that are more open, flexible and inherently collaborative.
Execute the business model at conference-room scale to test readiness. Set up a minimal viable product that your team can use to simulate a set of transactions. Doing so will allow you to prove whether your model will work or not, clarifying if third-party providers truly have the capabilities your company requires.