Want more M&A value? Focus on technology
February 19, 2021
Technology is a crucial aspect of any M&A deal. Yet, in the rush to get the deal done, it can be overlooked. Accenture Strategy analyzed 199 recent transactions that exceeded US$1 billion in value. For 70% of deals that underperformed their 24-month shareholder return sector average, dealmakers had put limited emphasis on technology early in the deal cycle. At the same time, for those transactions that did beat their sector averages, an overwhelming majority (80%) did place significant emphasis on technology during the transaction.
This underscores the importance of bringing the CIO to the table during target screening and due diligence. A CIO with a deep understanding of synergies driven by technology, who is not stunned by sticker shock, and who can establish a long-term blueprint for the integration and operations of the combined organization.
<<< Start >>>
<<< End >>>
Understanding technology-enabled synergies
Recent deal trends are demonstrating the value of M&A in an uncertain economy. While 2020 brought many uncertainties, according to Accenture Strategy analysis of Capital IQ data, fourth quarter deal announcements reached their highest level over the past ten quarters.
Capturing value through synergies and recouping investments is at the core of M&A―and companies that place early and significant emphasis on technology as part of their transaction strategy are best positioned to do so.
At the same time, quantifying tangible benefits from technology is challenging. As a result, it can be tempting to perceive technology investments during M&A as merely “the cost of doing business.” However, from our experience in supporting more than 1,700 deals globally in the past five years, we know that technology is a significant value lever, driving almost 40% of overall merger synergies either directly or indirectly. Viewing technology as a value lever―through the lens of return on investment―is crucial to deal success.
<<< Start >>>
<<< End >>>
Direct technology synergies typically account for about 15% of deal synergies. They stem from reductions in labor cost―including shadow IT resources―as well as from non-labor sources, such as the consolidation of complex technology systems and associated third-party support.
Some direct technology synergies, such as third-party vendor contract consolidations, are quick wins. However, most direct benefits from technology investments are subject to implementation timelines of up to three years, due to the nature of large and disparate enterprise systems. Often, these are accompanied by short-term negative synergies such as the need to support duplicate systems, or unanticipated one-time costs caused by contract novation.
While direct technology synergies may take longer to realize, the indirect, enterprise-wide business benefits enabled by technology changes are typically realized 6-12 months earlier. These indirect technology-enabled synergies typically represent 25% of overall deal synergies but are generally harder to measure due to the intertwined nature of IT and business. Business readiness and coordination is vital, as executive leadership needs to ensure across departments that a focus on short-term returns does not impede long-term success.
<<< Start >>>
<<< End >>>
Analyzing investments: Beyond “sticker shock”
A commonly used heuristic in M&A transactions is that each dollar of recurring annual synergy requires about a dollar in costs to achieve. Accenture Strategy research of transactions over the past decade shows that this 1:1 ratio does not hold for technology. The average investment range is 2-7x per dollar of expected technology synergies, making it the largest source of spend in most transactions. This disproportionate costs-to-synergy ratio causes sticker shock for many CFOs and CIOs. To understand why these investments are critical, we must look at two drivers: deal dynamics and technology complexity.
Deal dynamics are determined by factors including macroeconomic trends, industry fluctuations, enterprise operating models, and specific transaction goals. For example, increasing operating locations often results in substantial one-time technology investments to bring sites to a uniform standard and lower long-term operating costs. Furthermore, the COVID-19 pandemic has shifted the macroeconomic environment and highlighted the importance of investing in technology to accelerate digital operating models.
Technology complexity is influenced by the current-state landscape of both acquirer and target and the desired future state of the combined organization. CIOs should begin technology conversations from a value and strategy perspective at the earliest stages of the deal lifecycle:
- What are the enterprise goals, value levers and guiding principles?
- Are we redesigning our business operating model?
- What is our appetite for technology transformation?
Answering the questions above will require making strategic tradeoffs. For example, higher levels of hardware, software, and platform consolidation will lead to a more complex and lengthy integration process. Some leadership teams prioritize quick wins, while others pursue large-scale change from the start. They may leverage M&A activity to not only sunset legacy technology but also build a new set of operating capabilities. Early alignment on strategic goals between technology and business teams is critical.
<<< Start >>>
<<< End >>>
There is no “one size fits all”
Beyond committing the appropriate level of funding, C-suite leaders must establish a long-term blueprint for the integration and operations of the combined organization while ensuring value tracking measures and governing bodies are in place. In analyzing 800 global M&A transactions, we found that just 27% resulted in both operating margin improvement and revenue growth. One reason for this is an inability to execute on long-term goals, including in technology. Successful leaders recognize that technology, with the right support and governance, is a substantial source of synergies.
Unfortunately, many C-Suite leaders are navigating these challenges without the support of an experienced strategic advisor or dedicated resources. If your firm is contemplating inorganic growth opportunities, develop a clear plan for your investment thesis and prioritize technology investments and synergies as part of this.
Early emphasis on technology can be the fuel that powers your enterprise’s M&A growth engine and unlock significant shareholder value. We’re here to help you achieve these goals.
I would like to thank Jeff Wu and Nikhil Iyer for their contributions to this post.
