No more lengthy TSAs. We expect lengthy Transitional Service Agreements (TSAs) between a buyer and a seller will be a relic three 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 have markups up to 10% with an escalating pricing premium over time—limit buyer flexibility and increase dependency on the seller.
The benefits of as-a-service. Especially as-a-service solutions can make a significant difference to the TSA length. We have seen companies shorten the TSA period of the “longest tentpole”—ERP or infrastructure-related service elements—from 24-36 months down to 9-12 months. Instead of carving out or integrating existing systems, an entirely new, cloud-based system is deployed. While this requires some involvement from the business, it brings the added benefit of accelerating both automation and process standardization.
Bridge services fill the gap. Companies no longer need to rely on their own in-house IT 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. Increasingly, 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.