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 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.
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.
Utilize as-a-service alternatives. Instead of cloning IT systems, consider using proven as-a-service solutions to rapidly shift entire infrastructures from one company to another. This eliminates the need for the seller to maintain legacy infrastructure until the buyer gets up to speed and transfers can be made.
Embrace the ecosystem. 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.
Test the business model at conference-room scale. 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.