Transaction to Transformation: How an M&A Can Lead To Digital Transformation

According to a recent survey, 70 percent of all companies have either already developed a digital transformation strategy or are in the process of creating one. That means 30 percent of all companies are doing nothing to transform their business for the worldwide technological shift that’s already in motion. This is a big issue but one that seems almost inevitable.

Digital transformation is expensive. IDC estimates that a digital transformation takes 40 percent of the entire technology budget of a company — a big problem for enterprises that are not big on technology spending since they would have to bring additional resources.

But there are a way enterprises can modernize and update their own technology operating model without having to pour in significant resources into pursuing a separate digital transformation strategy — by leveraging a merger or acquisition to integrate the target company’s IT systems and platform into its own and use the transaction as an impetus for transformation.

However, enterprises should not undergo a transaction with the sole purpose of a transformation — that should come later. Transactions alone are incredibly complex and thus its success should be the prime concern of the management. In other words, a company should see transactions as opportunities to modernize tech, build out a lean and scalable operating model, and trigger change — not as the first step of a digital transformation.

It’s also very important for the management to understand that digital transformations are extremely difficult and even simply tweaking the normal course of action of a merger or acquisition will not cut it. As enticing as it is to kill two birds with one stone, a transaction that leads to transformation requires even due diligence, research, and planning.

In Brief: What is Digital Transformation

Every business uses an operating model to deliver value to its customers and earn revenue. Digital transformation refers to a foundational change to all aspects of the business and integration of technology into the business model. Most typically, firms want to unify cross-functional departments by sharing data and technology to gain efficiencies and collaboration thereby easing delivery.

According to Smart Insights, 34% of enterprises have already undergone a digital transformation.

Why Is Digital Transformation Important?

Another trait of legacy businesses are silo-ed business units and/or technology enabling those business operations. For example, a firm might have a Marketing department running its own CRM system that isn’t tied to their financials platform and isn’t “aware” of actual sales data — regions, customer types, customer triggers, etc. This valuable information is silo-ed off and there are several attempts to reproduce redundant data across the enterprise, leading to costly duplication and overlapping processes.

But redundancy isn’t the only thing pushing more than 70% of all enterprises towards digital transformation. There is also:

1. New Revenue Streams

Technologies like the internet, on-demand, online payments, etc and have opened up so many new business avenues and opportunities that by integrating these technologies into their business model, enterprises unlock a host of new revenue streams.

2. Competitive Advantage / Counter Disruption

By upgrading core platforms before competitors, companies can maintain their competitive advantage. In other words, you can counter disruption in your industry by being a disrupter.

3. More Value For Customers

Customer expectations are changing in response to changing improving technologies, in fact, entire demographics are changing too — the generations are changing. Customers are prioritizing customer service and brand name (marketing) more these days. Especially with every other company entering a price war its competitors, it is important to provide value separate from just the good/service.

Today, this value comes mainly from convenience, speed, transparency, and more control over the buying process — all of which is hard to improve on with legacy technology.

4. Market Necessity

Right now, a digital platform is a necessity but soon enough it will be a requirement. And there are many drivers in the external environment that will make it a requirement. Rise of automation and robotics, a severe shortage of skilled workforce in blue-collar industries, IoT being a few of these market necessities.

You don’t see companies still operating on floppy disks and CRT monitors, do you? It’s because they either transformed or were pushed out by market forces.

How a Merger or Acquisition Can Lead To Digital Transformation

Digital transformation means bringing changes to nearly every aspect of the business, updating the business model, if you will. But this involves huge costs and can severely hamper productivity and employee morale if not done correctly. Something else that shares similar characteristics? Mergers and acquisitions.

Mergers & acquisitions and a digital transformation share a lot of processes, which means if planned for properly, they can be carried out at the same time. Here’s an illustration of how an acquisition can lead to a digital transformation:

Company A is a legacy business in an industry with a digital future. However, the management is unsure of the costs and procedures of a digital transformation and feel like they can ride the wave with their current model. But still, in a bid to solidify their market standing, they decide to acquire Company B, a startup with a fresh way of doing things that have earned it a lot of attention and customers. Though this isn’t their first acquisition, they decide to bring a team of M&A consultants to calculate costs, synergies, and expected bottom line.

The team reports back that the operating platforms of the two companies are incompatible and will have to be changed. Instead of making the startup compatible with Company A, it would be a wiser decision to upgrade to Company B’s operating platforms.

In essence, digital transformation is not just upgrading the IT systems, but modernizing and streamlining all aspects of the operating model (organizational changes, business process workflows, scalable technology, etc.). By leveraging an acquisition or merger to update your company’s IT systems, you’re cutting the digital transformation to-do list by nearly half.

But what if your business model is unique, is buying or merging with another company still as effective?

To Build It or To Buy It?

Digital transformation on its own is expensive but is it expensive enough to justify the costs of buying or merging with another entity. In most cases, yes.

Transformations and mergers (and acquisitions) both lead to instability and a degree of uncertainty but while transformations are often resisted by employees and other stakeholders, mergers and acquisitions are accepted as opportunities to grow. Since mergers and acquisitions are undertaken to achieve synergies, they lead to a higher level of malleability and openness among stakeholders and especially employees. On the other hand, the benefits of digital transformations are often harder to convey to workers who are forced to move from a known (and secure) to an environment they know nothing about.

Of course, there are exceptions. Businesses that have a significantly different business model and those that require extensive customization to the target digital platform will be better off building their own. Additionally, this is a long, tenuous, and risky process. Bold bets can lead to market shifting dynamics.

Case Study: Walmart’s acquisitions and partnerships

Walmart is one of the largest chains of department stores in the world, but the management at Bentonville realized that being a physical retailer, no matter how big, would not be ideal in an online world. So in a bid to maintain their superiority and fight off the growing threat of Amazon, Walmart has acquired a series of technology-based startups in the past decade. It’s digital transformation began with the acquisition of Jet.com, an urban e-commerce retailer. In the following years, the company acquired about a dozen more e-commerce platforms including one of the biggest e-commerce marketplaces in the world — Flipkart.

To further solidify its position in this new field, Walmart has announced partnerships with Microsoft for cloud computing (one of the fastest-growing industries) and with Google for voice-activated shopping.

When last year, Walmart started calling itself a “technology company”, in the same vein as Microsoft, Amazon, and Google are technology companies, many believed that these acquisitions and partnerships were just Walmart covering all fronts but it really is a digital transformation led by transactions — Walmart is 100% committed to seeing this transformation through and it’s using acquisitions and strategic partnerships to do so.

Transformation Won’t Come Naturally

It’s a common misconception that an M&A transaction will automatically lead to transformation and while big events like an M&A transaction can trigger organizational level changes, they won’t necessarily result in positive transformation or value creation.

In fact, looking at a digital transformation as just another transaction can destroy more value than it creates because, in every typical M&A transaction, there is a period of uncertainty and disruption when two entities have only three main purposes: try to achieve synergies, create value, and mitigate risks — nothing about changing the fundamental business model and underlying platforms to accommodate those changes. On top of all this, M&A transactions on their own carry a high degree of risk, adding complicated technological platforms to the mix only increases that risk.

For a smooth digital transformation through the transaction, management needs to look beyond the typical M&A challenges and take into consideration the fourth element of integrating technologies.

Wrapping up…

With the number of businesses competing today, every dollar counts, which means growth decisions must be critically analyzed. Digital transformation is one of those decisions and it must be done as efficiently as possible. One way of doing that is by leveraging a merger or acquisition to integrate the target company’s technological platforms into its own.

Enterprises are undergoing a digital transformation for a lot of different reasons but really it all comes down to survival. After all, you’ve got to be in it to win it.