Over the past few years, we have seen a rising trend in digital technologies driving tech M&A deals for both tech and non-tech companies.
Technology brings its own set of challenges to the M&A space. The following are some of the many differences between traditional and digital M&A:
- Wider target list: The list of targets in a digital M&A tends to be longer than in a traditional, non-digital deal. Therefore, a need for new screening methods arises if digital targets are involved.
- Financing and valuation methods: Digital assets are often considered to be too expensive. Valuing digital assets begins with determining how the acquisition will impact the growth-value profile of the company’s stock and equity profile. As target digital assets tend to be expensive, the avenues for financing an acquisition through the use of shares is limited. That being said, acquisition based on a 100% cash deal may also expose a company to overvalued goodwill and future write-offs.
- Due diligence process: Due diligence for digital targets is substantively different than traditional targets. For instance, acquirers are required to screen a target before its value has actually been monetized and thus, are faced with a lack of financial information.
- Integration of digital assets: There are two common ways of integrating digital assets into a traditional company: (1) integrating all aspects of the acquired company and incorporating it into the existing system; or (2) keeping the acquired assets separate from the traditional company to avoid overpowering its spirit. That being said, both approaches have been faced with successes and failures.
The following are recommendations made by Bain & Company in its article titled “The Changing Rules for Digital M&A” for achieving success in digital M&A:
- Develop a digital strategy as part of an overall corporate strategy.
- Consider all financing options, including adapted payment terms such as earn-outs or other deferred payment mechanisms.
- Consider the scalability of target digital assets in terms of human resources, technology and business models.
- Nurture and mobilize specific digital experts during the due diligence process.
- Enhance cultural integration practices to preserve and develop a digital target’s entrepreneurial culture.
- Understand where and how digital approaches could transform current operations and business model.
- Consider non-conventional ways to retain talent.
- Equip investor relationship management with right communication tactics on how the company is embracing digital world.
The author would like to thank Shreya Tekriwal, Articling Student, for her assistance in preparing this legal update.
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