Beyond growth: M&A as a strategic transformation enabler

The next generation of M&A strategy brings emerging digital capabilities to the forefront in support of both opportunities and risk mitigation. Deals are developing beyond core business growth, encompassing new digital opportunities and emerging technologies as drivers of strategic acceleration. Specific next-generation areas of focus include:

• Entering new business frontiers, including enablers like AI to derisk entry into new methods
• Testing technology-based opportunities to improve timeliness and derisk change
• Mobilizing into unknown business segments, such as adding sustainability products
• New go-to-market models, opportunistically transforming channels and distribution capabilities
• Support for planned business restructuring, where rationalization or divestiture carries digital risk
• Expanded focus on partnerships, where digital integration takes partnership beyond a takeover scenario

Delay and uncertainty as emerging risk factors

External factors are driving unheard-of levels of deal uncertainty and delay. For instance, the increasing cost of capital has affected access to and use of money across all sectors; an increasing regulatory focus on competition and industry dynamics has driven increased scrutiny as a critical factor for uncertainty; geopolitical uncertainties, including unprecedented conflicts across many regions, have forced delays. Regardless of the cause, the impacts of a delay can be material:

• Strategies and valuations, where delays stress the cost model
• Loss of momentum, where stakeholder commitment can wane
• Prolonged distraction, affecting adjacent business teams and dependent activities
• Team and skill retention, where delays and uncertainty amplify execution risk

The new digital opportunities

More organizations are turning to M&A activity to accelerate growth and transformation, with digital imperative underscoring the emerging opportunities.

For example, according to IDC research, datacenter capacity is a critical focus for M&A activity, with total deals in the first half of 2022 estimated to be over $24 billion (Colocation Segment Trends: M&A Drives Datacenter Investment, IDC, February 2023 ). This premium on digital capability is evident in the $15 billion acquisition of datacenter operator CyrusOne, which attracted a 25% premium on share price in 2022. And the need for AI processing capacity suggests that segment will increasingly be an acquisition target.

Similarly, acquisition of companies for new development capability and talent is also emerging, with IDC’s Future of Digital Innovation Sentiment Survey (July 2022) suggesting a significant jump in the ranking of acquiring tech startups:

CIOs and digital leaders have well-honed skills and bring critical capabilities to the emerging M&A landscape. Specifically:

• Scenario-based planning: Digital investments always involve disciplined analysis of the options.
• Contingency planning: Digital teams are continuously responding to unanticipated events and consequences.
• Integration planning: Milestones provide critical digital governance.
• Resource planning: Digital investments by definition address people, process, and technology in the business case.
• Transparency: CIOs are often required to be the bearer of unfortunate news.

CIOs can leverage these unique skills to support emerging digital M&A priorities.

M&A strategy: Ask smart questions

Deal strategy is the foundation supporting all aspects of M&A. Use strategic questions such as the following to proactively fill white space or close gaps:

• Are there areas where the business is lagging or unable to accelerate?
• What technology would amplify or leverage differentiation?
• What capability gaps limit business performance?
• What data sources and analytics would enhance or expand positioning?
• Can social or pervasive technology change the product, extend business reach, or inform adjacencies?
• Can improved customer analytics drive actionable insights?
• What geographies boast digital superiority, presenting opportunities for leverage?
• What geographies report less advanced capabilities, presenting an advantage?
• What digital capabilities would improve channels or distribution?
• What transformations would improve operating leverage?
• What are unique strengths, where ecosystem partners would benefit?
• Where could different ways of working bring higher value?

Whether responding to a specific opportunistic event or more generally analyzing market opportunities, strategic questions can broaden the deal team’s perspective.

Valuation and diligence: Be intentional

The valuation stage is critical to test assumptions, anticipated risks, and valuation, so it should clearly define the risks and elements of variability to ensure that missed assumptions and planning surprises can be identified and addressed.

Use valuation and diligence activities to establish governance and capture all risk elements even if they appear to be mitigated. Ensure that all questions raised have intentional responses; validate talent and capability assumptions in the planning model; be precise on technical debt, vendors, and data strategies; and be clear on assumptions regarding the level of consolidation or integrations required.

Execution success

Five key principles enable execution success, looking beyond day 1 to deliver the expected transaction value:

• Have the execution team in place prior to the transaction date.
• Include execution team members in the valuation and diligence work as feasible.
• Have a clear blueprint for action resulting from the diligence stages.
• Define clear decision governance supporting effective decisions and escalations.
• Facilitate conversations about options and trade-offs.

As a guiding principle, set the bar early for how teams should work through issues and how they will be supported by management. Effective governance will determine how a transaction is experienced and will define the success of the investment strategy.

Digital capabilities are critical drivers for M&A activity. Being proactive and leading with the strategic questions early in the deal analysis can amplify the value and mitigate transaction risks. Digital leaders can elevate the conversation from a linear financial or business discussion by leaning into time-tested approaches including amplifying future-facing digital strategy balanced by old-fashioned IT skepticism. Leverage core and emerging digital value to set M&A transactions up for more sustainable value with less residual risk.