After already considering the impact of digitalization on companies’ M&A strategies, we now turn to the effects of digitalization on the M&A process itself.
Digitalization of the M&A Process
In addition to influencing M&A strategy, digitalization also affects the M&A process itself. While digitalization supports the general execution of processes, it also changes the required scope of review. The use of digital data rooms during due diligence and digital platforms for buyer or seller outreach has become standard. At the same time, the IT systems of the target company receive greater attention during reviews. In terms of content, corporate valuation, due diligence, and post-merger integration face new challenges.
Corporate Valuation
Digitalization has a particularly strong impact on corporate valuation in two areas: the execution of the valuation and the resulting valuation level.
Within established, capital-value-oriented valuation methods, past performance analyses are typically carried out to identify influencing factors and value drivers of the business model. These insights are then used to validate and assess future cash flows. However, as business models are changing—sometimes fundamentally—through digitalization, and at an increasingly rapid pace, the relevance and explanatory power of past performance analyses is diminishing. The same applies to simplified earnings-based methods, which also draw heavily on past performance.
Experience from digital acquisitions has shown that “digital” companies generally command comparatively high valuations. The resulting high asking prices deter many potential buyers. For instance, Facebook acquired WhatsApp in 2014 for around €14 billion when the company had just 55 employees. A similar phenomenon can be seen in the SME space: the IP telephony company Askozia was sold for four times its revenue.
A high purchase price, however, can be justified if the acquisition opens new business or technology fields for the buyer. Looking at purchase price in isolation is insufficient in digital acquisitions—rather, the effects of the deal on the acquirer’s own valuation must be considered. Facebook, for example, targeted WhatsApp’s rapidly growing user base and the scalability of its business model.
Due Diligence
Traditional due diligence usually examines the company’s current position and past performance in detail. In the acquisition of digital capabilities, however, the focus should increasingly shift toward analyzing strategic implications and potential future developments, supported by scenario analyses. It is particularly important to assess developments not only for the next 2–3 years, as is customary, but possibly for a longer period in order to properly evaluate the acquisition.
Integration
As with traditional M&A deals, sensitivity is required in the integration of digital acquisitions. Particular care must be taken to retain the “digital know-how,” which is often concentrated among a small group of people, and not to risk attrition through overly aggressive integration or by ignoring potential cultural differences between the two companies.
According to a Bain study, however, 90 percent of digital M&A transactions are scope deals (transactions aimed at expanding the customer base, market, sales channels, or product portfolio), and therefore only require partial integration initially. “Most digital subsidiaries can and should operate largely autonomously in their markets,” Bain notes. Nevertheless, mechanisms such as a “digital day-one” integration team remain useful to ensure that both companies pursue a unified digital strategy.
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