Implications of findings for PE firms
With digital acquisitions different in nature from traditional M&A, corporate retailers are starting to re-think their M&A capabilities and processes. Fifty-seven percent of global retailers already modified their M&A capability to address investments in digital, and 58 percent follow valuation and cost models that differ from their traditional M&A evaluations.5
It appears the PE community is following suit. Although digital acquisitions present a huge opportunity for PE firms, an additional set of investment criteria for PE deal teams evaluating a target, with new skills and experience, is required. PE and competing trade investors increasingly need to understand the growth drivers, opportunities and risks as they relate to the digital business.
PE firms should consider the following questions.
What are the current key performance drivers in this digital business and how do they rate versus the competition and best of class?
In addition to fundamentals such as product, price, brand and service, PE firms need to look at all digital elements of the target business. This includes its digital marketing capability, user experience and customer journey mapping, digital performance economics, customer lifetime value management, mobile and digital technology requirements and enablers, and one-to-one supply chain economics, as well as management’s core competences.
What are the growth opportunities and how achievable are they versus the management’s plan?
Firms need to assess performance improvement in the existing business (across the issues above), omni-channel improvement or growth, international expansion, product range or service extension, and partner relationships to strengthen or support the growth plan.
What are the main risks?
And finally, the risks that need to be considered include questions such as: Will the existing technology scale to support management’s growth plan? Will the existing supply chain scale efficiently to support management’s growth plan? How do I sustain the competitive advantages I have in this fast-changing space?
The digital age presents new opportunities as well as risks for UK PE firms active in the Retail and Consumer sectors, so it’s imperative for these firms to develop or engage the right skills and expertise to evaluate new investment opportunities as comprehensively and robustly as possible.
1 Consumer includes Travel, Bars & Restaurants, Leisure, Food & Beverage, Consumer Services
2 Javelin Group Analysis 2017
3 Accenture Strategy, M&A Research, 2017