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Realising deal value through digital transformation

Deloitte’s Head of M&A Consulting Services, Simon Brew, looks at how digital transformation can reward dealmakers and the forms this can take.

With continuing geopolitical and market volatility, fluctuating debt costs, inflationary pressures, and ongoing supply chain disruption, businesses are having to work harder to drive value from deals. 63 per cent of business executives believe that M&A success depends on transformation within their business2 and we’re seeing clients use M&A as a catalyst for digital transformation that will drive growth, develop game-changing capabilities, fast track new business models and products, and deliver back-office efficiency. Deloitte Technology M&A specialist Tim Buckley, puts it neatly, "If you’re taking the traditional approach and going into a deal viewing technology purely as a risk to be managed, you’re going to be leaving value on the table."

Transformation is becoming increasingly important in the deal value equation. Savvy dealmakers are using M&A to accelerate technology-enabled business transformation, to secure every ounce of deal value. And with successful digital transformations allowing organisations to realise 12.5 times the market cap increases than their competitors1, it’s easy to see why.

Savvy dealmakers are using M&A to accelerate technology-enabled business transformation, to secure every ounce of deal value

When does transformation through M&A make sense?

 

Using M&A to drive a transformation reduces the number of disruptive events that your organisation must go through, and you can use the momentum the deal creates to smooth the way for this change. According to Tim, the conditions are perfect, “there is the focused attention of senior leadership; the organisation will be more tolerant of change; and an effective governance model will already be in place. All these accelerate the pace of transformation and improve the odds of success.”

Not every transaction drives transformational change, and nor should it - but it should be consciously considered as part of the deal. “Transformation is feasible for any type of deal and at any point in the deal lifecycle, but it pays to start early and move fast”, says Tim. Sellers can transform a business while carving it out in anticipation of a sale. This can create an agile, future-ready business which is more attractive to potential buyers.

For buyers, transforming the target and the legacy business could be done in parallel to the transaction, and continue after deal closing, allowing you to achieve the target vision as quickly as possible.

What does transforming through M&A look like?

 

There are three main drivers behind digital-enabled transformation, and the path that you take will depend on the value drivers behind the deal, and your broader corporate strategy. Cost saving is an obvious and common driver, but Deloitte Consulting’s Technology M&A lead, Nadeem Mohammed, cautions against thinking too narrowly, “If you’re only thinking about digital transformation as an efficiency lever you will be missing a trick. It’s important to also evaluate the opportunities that established and emerging tech provides to fundamentally reimagine your business and to grow revenue.”

Technology helps organisations engage with customers in new ways, including customer centric marketing, taking a digital-first approach to sales and customer care, and driving seamless engagement across the entire front office. Nadeem cites UK retailer John Lewis as an example, “With support from our team, it has re-invented the department store for the digital era by becoming a ‘mobile first’ business, creating a better mobile experience for shoppers while reducing running costs. Within two years, app revenue grew by 186 per cent, contributing to an overall growth in profit of 38 per cent”3.

This is about becoming a more innovative, agile and ‘future-ready’ business, able to adapt to changes at speed, and disrupt the markets that you operate in. Nadeem sees endless possibilities for technology to play a role. “Our teams are helping clients use digital to re-shape their businesses in incredible ways. The opportunities are mind boggling.”

“A particularly innovative example is where we have applied our advanced analytics capabilities with our industry expertise, and then added Formula 1 grade technology, developed through our partnership with McLaren, to transform the supply chain and production operations of a global drinks manufacturer”, says Nadeem. “We created a digital copy of their factory and supply chain operations, allowing millions of scenarios to be tested without disrupting production operations.” This has allowed the business to realise, on average for each production line, €1 million in profit and loss benefits and a €1.6 million improvement in working capital. The impact included up to 25 per cent reduction in changeover times, up to 30 per cent reduction in inventory, and the opportunity to reduce external warehousing space and cost. All of this while delivering higher levels of service4,5.

Technology is critical when modernising the back and middle office operations, creating a ‘digital core’ for finance, supply chain, procurement, operations, and the workforce, resulting in improved SG&A, COGS , and overall asset efficiency. In the oil and gas industry, for example, one company opted to pursue IT transformation simultaneously with a divestiture. Based on a cloud/SaaS architecture, the transformed IT operating model reduced operating expenses by 35 to 40 per cent6.

“Robotic and intelligent automation are examples of technologies that can do a lot of heavy lifting to drive down cost and increase efficiency” says Nadeem. “We’re helping many clients apply Robotic Process Automation to repetitive, task-based activities, followed by more sophisticated cognitive automation of end-to-end processes, leveraging capabilities such as machine learning, natural language generation, and speech recognition”.

The use cases for intelligent automation are extensive (including Accounts Payable in Finance, Recruitment in HR, and Order Processing in Supply Chain) and Nadeem cites some significant results. “Organisations who adopt it achieve a typical cost saving of 32 per cent and one financial services organisation has achieved over 70 per cent cost reduction in targeted areas by radically re-engineering their business processes and adopting multiple interlocking automation tools7.”

As these examples show, the possibilities presented by digital transformation are almost limitless. So where should dealmakers start? Nadeem advises, “go back to the fundamental questions: why is the deal being done, what drives value, which parts of the business need to be transformed as a result, and how can technology enable that?”.

 

Digital transformation through M&A – How to approach it

 

Tim Buckley shares top tips for getting M&A led digital transformation right.

Think about the transformation as early as possible - ideally, pre deal. Create a clear story and connection to the deal rationale; decide what the end-state ‘North Star’ business will look like, and how digital technologies will enable that. Make the big, strategic decisions early and to use the momentum of the deal to get the organisation behind the transformation.

Bring the right leaders from your technology, digital and business organisations into the conversation early to help imagine the art of the possible, and to shape how technology will support the overall business vision. In parallel, co-ordination and co-operation between buyer and seller is essential.

Use the North Star as a guide to assess which digital imperatives will be most worthwhile. This drives a laser focus on value and often results in making a small number of big bets which align to the deal’s business case and the ambitions of the business.

Executing deals requires disciplined delivery capability - digital transformations are no different and should be delivered with that same M&A rigour and mindset. Assemble your top technology and business talent – the people with the right capabilities, skills, and experience - to shape and deliver, at speed, the outcomes you want. Whilst technology is often the largest cost in an integration / carve-out, it can be a direct enabler to achieving up to 70 per cent of the deal’s value case so delays can be costly.

Transformation brings new processes, technologies, and ways of working, and the impacted workforce need to be able to adapt to these changes for value to be realised. A well planned out and executed change management capability will help avoid wasted time, effort, and capital, and reduce the risk of top talent leaving the business.

Establish clear metrics and a process to capture and measure the value delivered. Set goals for each business and technology team, measure continuously and fine tune where necessary – ensuring that this is embedded in business-as-usual processes so that value can be accurately captured, measured, and managed.

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