Companies face new M&A dynamic amid a flurry of digital deals


Digital deals accounted for ~32% of all transactions last year, level expected to increase this year.

Traditional companies that are eager to acquire or enhance their digital capabilities through M&A are facing new acquisition challenges as they compete for assets, according to a new Mergercast: Digital Deals – A New Frontier by Strategy&, PwC’s strategy consulting business.

In a hot market for digital M&A – where the targets are hardware, software, IT service, or Internet companies — traditional firms must both pick the right deal, and strategically use the them.

Globally, digital deals accounted for about 32% of all transactions in 2015, up from 20% in 2011, with that level expected to increase this year. The greatest spike in acquirers was in non-digital industries, such as automotive, retail and wholesale, aerospace, defense, and hospitality.

One of the key challenges for non-digital acquirers is identifying a suitable target. Strategy& says that companies can break this down in ‘three ways to play’:

  1. Identify whether you want to add analytic or digital capabilities to an existing business
  2. Acquire new or complementary business models
  3. Digitize your value chain

Co-author J. Neely, a specialist in mergers and restructurings for Strategy&, principal with PwC US, outlines how acquirers must cast a wide net when considering targets. Neely says, “Many target digital businesses might operate out of garages, as venture backed start-ups or in university basements. You must have a real clarity of intent and purpose, and the three ways to play becomes important to driving focus.”

Traditional deal pricing is out the window

Given that many digital acquisitions may be pre-cash flow, historic valuations are often rendered moot. In this regard, Joerg Krings, a partner with PwC Strategy& Germany based in Munich, says, “Accurate pricing requires clarity around the company’s strategic intent, and which acquired capabilities a company wants to integrate into its current business.”

“Valuations often look high from the outside. But if you go into the details of value captured over a length of time or business loss that has been avoided, quite a lot of them are justified. There’s always the risk of a bubble here and there.”

Deal integration is challenging

While digital deals are often executed to enhance the capabilities of a company, this raises considerations around talent retention, and keeping people engaged. Other considerations include whether an acquisition is a standalone, part of a platform, or a larger integration.

Neely says, “Digital deals are less about driving very significant cost synergies. It’s usually more about how you weave the capabilities into the firm, keep talent motivated and engaged, and make sure you actually get the right range of use of the acquisition across the business.”