Strategy& of PwC published Mergercast “Digital Deals – A New Frontier” (Episode 56) in July 2016, which discusses the growing rationale for digital deal-making and post-deal challenges. Particularly, this podcast identifies that digital deals accounted for nearly 32% of all transactions in 2015, up by 20% since 2011, indicating the growing appetite for digital M&A. Many companies operating in traditional industries are looking to enter into or enhance their digital capabilities by identifying digital targets, particularly hardware, software, IT service and Internet companies. Digital deal growth is most notable in non-digital industries, such as automotive, retail and wholesale, aerospace, defense, and hospitality.
Focusing on retail and wholesale specifically, a Deloitte publication predicts that growing e-commerce and declines in foot traffic require retail-based companies to find innovative opportunities to digitize a once traditional business model. To identify a suitable target, the purchaser must strategically consider whether it plans to add analytic capabilities to an existing business or to create true versions of digital products or services. In the case of retailers, Deloitte suggests in another publication that incorporating analytics on weather, labour and staffing, store layouts, CRM data, real-time location and websites are necessary for the purposes of long-term planning. To that end, it is expected that we will see an increased blending of online and offline value offerings by physical retailers. Strategy& further indicates that purchasers may also seek targets which can digitalize their value chain, a less obvious-to-consumer alternative to incorporate the benefits of digital targets. For example, companies such as Amazon.com, Inc. have changed the landscape of retail and wholesale, by significantly improving the traditional model through its digital platform and analytic capabilities. In all cases, completing a digital deal is less about driving synergies than a traditional deal and more about gaining access to the advantages of digitizing a business.
Despite the many benefits of digitalizing businesses, identifying and integrating a target are key considerations for purchasers. Strategy& suggests that many targets are grassroots in nature, often operating out of garages and university dorm rooms. The nature of the digital industry increases the challenges associated with deal valuation and integration, emphasizing the importance of a well-structured deal to fully capture its advantages.
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