As digital moves front and center within the Retail and Consumer1 sectors, both corporate and private equity (PE) mergers & acquisitions (M&A) are changing. With the number of digital acquisitions growing rapidly, how can PE firms ensure they have the right M&A analysis and advice in place?

The structural shift from offline to online consumer behavior and spending is mirrored by a similar change in investment behavior among United Kingdom PE firms, with a growing focus on digital assets. It is over a decade ago that UK PE firms first invested in digital-only (pure-play online) businesses. Since, digital-only deals have increased substantially to nearly 30 percent of UK Retail and Consumer M&A volumes in 2016, a doubling of share from 15 percent in 2013. Specifically within Retail, nearly half of all transactions involved digital-only businesses in 2016, up from around a quarter in 2013.2

As online penetration continues to grow across the Retail and Consumer sectors, and disruptive digital business models change how services and products (from leisure activities to food) are consumed, we expect digital to have an increasingly powerful influence on the UK investment landscape over the coming years.

We also expect to see a continuation of the following trends among investors.

Firstly, PE investors will face growing competition from business corporations generally, and retailers specifically, as management teams increasingly look for both accelerated growth channels/models and to stimulate digital transformation in their own businesses. For UK corporations, the need for next-gen technology is cited as a trigger for M&A as often (48 percent) as expansion in the same or a new industry (49 and 48 percent respectively).3

This trend has already taken hold in the Retail industry, as an increasing number of corporate retailers—in their quest for survival through strategic innovation—are embracing M&A as a way of driving fundamental business model change by pursuing digital technologies or capabilities they do not yet possess. In fact, 82 percent of corporate retailers globally said they either have acquired a digital company in the past two years or are considering acquiring a digital company to gain the latest cutting-edge technology and talent.4

Secondly, we expect to see growing consolidation of digital skills and experience—both in deal teams and in operating partners and advisors—in some PE houses, from mid-market to large-cap firms. Investor experience in the digital arena is breeding increased understanding of both the opportunities it brings and the challenges.

Fifty-seven percent of global retailers already modified their M&A capability to address investments in digital

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

4 Ibid

5 Ibid

Michael Fine

Managing Director – Accenture Strategy


Subscription Center
Stay in the Know with Our Newsletter Stay in the Know with Our Newsletter