Impact and treatment of IT assets in M&A
August 2018 | TALKINGPOINT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
August 2018 Issue
FW speaks with Mark Steele at Deloitte LLP about the impact and treatment of IT assets in M&A.
FW: In what ways have technology assets become a key lever for businesses undertaking mergers & acquisitions (M&A)? How would you characterise the role technology is playing in transaction processes?
Steele: In 2017, deals undertaken by non-tech firms buying technology assets exceeded acquisitions by technology companies. This shift was the result of robotics, FinTech, artificial intelligence (AI), the Internet of Things (IoT) and analytics, all of which are now significant value drivers for non-tech organisations. Additionally, the implications of technology as a disrupter to traditional businesses have now become a significant factor in acquisition strategy; people have moved from owning the aisle to owning the customer. This shift is a consequence of technology and the maximisation of data as a business asset. This has had two implications for the deal process. First, diligence is now focused on the revenue implications of technology as well as the efficiency it brings and there has been a significant rise in the need for data analytics and General Data Protection Regulation (GDPR) or data security diligence, which takes a fundamentally different approach to what has historically been called IT diligence. Historically, technology due diligence focused on identifying cost synergies and enabling an integration or separation. As companies invest and divest technology assets and continue to make investments with an increasing dependency on technology-driven business and innovations, it is essential that business executives understand technology in order to make broader strategic decisions within an M&A context. Furthermore, the ever-increasing importance of data is driving change on how technology assets are assessed within the transaction as considerations are broadened to not only include the technology environment but also the regulatory landscape it sits within. The second implication of technology is that the way professional organisations are undertaking their diligence is changing radically, with organisations now using high-powered analytical tools. M&A practitioners and operational experts are able to deliver faster and more insightful analysis to management teams. This analytical capability, mixed with mapping and presentation technologies, means that management teams, bankers and buyers are being given a richer insight and a greater ability to challenge and undertake scenario analysis on their M&A assets. This is a significant shift from traditional diligence and is changing the roles of M&A professionals.
FW: How have disruptive technologies changed the M&A landscape in recent years? What are the implications for how transactions are pursued?
Steele: Disruptive technologies are constantly driving change in the M&A landscape, prompting investors and impacting the strategic choices of buyers. It continues to be the case that defensive acquisitions are the least appealing deals to M&A leaders, and increasingly, organisations both within the technology sector and outside of it are buying assets at earlier stages of their development, in order that they may realise the innovative market opportunities these organisations offer. Such acquisitions offer significant benefits and risks to the merger integration strategy, to the management of talent and to the focus of businesses research and development (R&D). Some key lessons can be seen in integrations by ensuring synergies are achieved, but equally in ensuring the unique benefits and talent within the acquired organisation are retained. We are increasingly seeing integrations which accommodate a maximising value rather than cost synergy ethos. More broadly, these types of acquisitions are creating differing business risks with the potential to introduce new cyber threats to businesses as a result of their acquisition strategy. Increasingly, security diligence is a specific addition to the portfolio of diligence requirements.
“Ensuring that you select and align the correct technology to suit your business model will help deliver success.”
FW: To what extent is technology altering the approach businesses take to divestments, extracting synergies and post-deal integration? What do M&A practitioners need to consider as part of such processes?
Steele: The approach businesses have taken to divest, integrate and identify cost synergies have always been underpinned by technology. M&A practitioners continue to make technology one of the key aspects to any transaction and, as a result, any IT integration or separation continues to require significant planning. Investment around any major system cutovers typically takes the focus in M&A transactions. For example, historical data is commonly a key talking point between sellers and buyers which consists of discussions over costs, resources and infrastructure constraints in order to understand ownership and access historical data. It is essential for practitioners to ensure considerations like these are made as early as possible within a transaction in order to ensure there is a smooth transition between the buyer and seller. However, technology is affecting how sell-side M&A is being undertaken, with data analytics and data scientists helping to deliver richer and more insightful analysis of business performance than previously seen. What would have taken months previously is now taking just weeks, and as such the analysis and insight of sell-side teams which use modern technologies to support their work is significantly increasing and is helping organisations better position their sell-side value story.
FW: What should businesses be doing to increase their understanding of technology as a source of strategic value in an M&A transaction, in order to maximise returns?
Steele: There are two drivers for technology. Value one is being clear on the revenue and customer experience delivered to clients to create value. The move to ‘owning the customer’ means the data and customer asset has greater business value, while the mobile and internet engagement of clients through technology is a significant factor in medium-term business performance, and business value. Undertaking diligence around the user experience, customer engagement and customer data are all factors which impact value. Equally, how the diligence is undertaken and the use of leading analytics and presentation technologies to properly analyse and realise the value of the information held by organisations is an important factor in the presentation of asset value.
FW: Are traditional risks and sources of value for technology in a deal still as important?
Steele: The traditional risks and sources of value are still highly relevant; these have not gone away, despite the increased use of bots and AI. Technology is simply a means of amplifying the impact and value of traditional business drivers and performance. Data is only king if it has a business which is valued by its customers. Thus, technology remains an enabler, though its impact is more widespread than 10 years ago. Consideration for the stability, sustainability and scalability of technology is still highly relevant and should not be ignored. If the technology stops, then so might the entire business supply chain; therefore understanding the basics as well as the more recent technology phenomena are equally important. But the need for scalability and sustainability of IT environments, where information governance policies and frameworks such as security measures, technology, strategy and architecture (TSA), day one planning activities and data centre management, remain critical.
FW: With technological innovation continuing to shake up and redefine business models, what essential advice would you offer to companies in terms of utilising technology to push the boundaries and remain competitive?
Steele: Essential advice would be to remember it is about the customer and that technology and innovation, even the most disruptive innovations, are about doing the right thing for the customer if they are to be successful. You must ensure that your technology and innovation reflects this. Ensuring that you select and align the correct technology to suit your business model will help deliver success. Delivering a good idea badly can prove very costly, so focus on executing the integration and implementation well and in line with your business model to ensure asset value is not lost.
FW: Looking ahead, what are your predictions for the evolution of technology and its impact on future M&A trends?
Steele: The key future technology drivers will be focused on AI and business information analytics, on blockchain-type technologies and the use of analytical robotics to better and more accurately sift through the growing data lakes organisations are building. As a consequence, protection and IT security are essential. Reputation risk will increasingly be an issue and consumer trust can be fickle, so ensuring chief information officers (CIOs) have the right housekeeping of the IT estate will be equally important.
Mark Steele has over 18 years experience in delivering carve-out and post-deal programmes for leading corporate organisations and private equity. Over the last decade he has led some of the largest technology deals. He has also led all aspects of the technology deal programme, including deal negotiation, technology, strategy and architecture (TSA), cost modelling, solution design, planning and execution. He has also led mainstream business and technology transformation activities, delivering right sized and process and MIS change programmes. He can be contacted on +44 (0)20 7303 5393 or by email: masteele@deloitte.co.uk.
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