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Digital M&A: a dealmaker’s digital toolkit for survival

Why leveraging digital tools and strategies are essential to guide target selection, capture value and de-risk deal execution

In 2021, the global M&A market exceeded $5 trillion in deals for the first time in its history – an equivalent of about 25,000 transactions. Strategic M&A investors made up almost 75% of the market accounting for more than 18,000 transactions. But how many of these deals build shareholder value? Our own research found that 50% of deals fail to meet their strategic objectives, and a study by Harvard Business Review found that number to be as high as 90%.

While that is not a great success rate, dealmakers can tilt the odds back in their favour through better use of digital tools and strategies to help find the right deal earlier, identify value, and ensure a better understanding of the risks.

Precision Targeting

There are multiple reasons why deals fail, but like most things in business, failure can be avoided by creating the right strategy as the first critical step. In M&A, it’s about finding the right deals to drive the corporate strategy. This is where digital M&A tools can guide the targeting process with precision and pace. Five areas of distinction to consider when evaluating a target are:

  • Distinctive products

    What products or services could grow your business and/or consolidate the market?

    In one scenario, digital M&A tools were used to identify key players in the food colouring market, the size and quality of their portfolio, the strongest patents and where intellectual property competitor risk might arise. Suitable targets were identified in hours compared with a manual process that typically took 18 months.

  • Distinctive Intellectual Property

    What technologies could enhance your products or services?

    In a recent deal, an investor sought to acquire distinctive intellectual property in the form of a 3D-rendering algorithm. Digital M&A tools were used to determine the competitive strength of the algorithm in advance of acquisition. Alerts were then set up for new entrants into the market.

  • Distinctive people

    How can the right talent be found to scale your business quickly and successfully?

    When distinctive intellectual property is found, talented people are typically behind it. Digital M&A tools can be used to fine-tune the search for innovators, engineers and other talent to accelerate your business.

  • New markets

    How do you launch and scale new market opportunities?

    Corporate M&A strategy may best be served by launching into an adjacent market, finding the right platform to establish the market and scale-up by building on a firm’s existing unique products and services, talent and technology. Digital M&A tools can be used to search for thousands of adjacent market companies to find suitable candidates with precision, through the identification of technology or people who perhaps have yet to achieve broad geographical customer rollout and sky-high valuation.

  • Innovation

    How is M&A activity fostering your business innovation?

    M&A is often viewed as an inorganic way of capturing innovation through acquisition, but it can also be a strategy that builds something new through the integration of products and services, or by acquiring new talent and innovators. Digital M&A tools can be used to validate future innovation hypotheses and to find the ‘white space’ where investment will yield best returns.

Pinpointing value

Once identified, making sure the price is right is also critical in the deal, and again, digital has a key role to play. Over the past ten years or so, the way businesses are valued and the way they create value has changed. Digital platforms have begun to create huge value – even in the absence of revenue – and, in many instances, it’s the tech they’ve created and the data they hold where the real treasure lies. This is as much the case for a traditional tech company like Google or Amazon as it is for an automotive business such as Tesla.

That means that the due diligence process for buyers and sellers must shift to reflect the changed make-up of almost every tech-enabled business. Can the target’s technology deliver the expected competitive advantage and scale to meet business growth plans? Is there any technology debt such as legacy platform or code? Can the target’s product easily integrate into existing solutions?

These questions and more require specialist diligence expertise to answer and ensure deal value is captured, as well as in fully understanding the digital risk of an entity from both a resilience and performance perspective and assessing its ability to scale in line with an investor’s growth plans. This specialist diligence, however, is often missing from the deal.

Deal execution risks

Data protection and intellectual property rank as the number one litigation concerns in the deal process according to Aon’s latest C-Suite Series M&A report, Better Decisions for Deal Value, – reflecting the rising caution related to managing digital risk. But while both buyers and sellers started to recognise that digital risk often represents the biggest potential downside in a deal well beyond the usual suspects – like tax, regulatory, or employment issues – there is still a disconnect when it comes to undertaking the specialist cyber due diligence needed to protect and enhance deal value.

Well over half of all M&A participants are still not recognising the potential value destruction from digital risk, whilst also foregoing the scope for significant value enhancement. As digital risks continue to grow, this imbalance must be addressed.

For buyers

In practice, what does this digital focus mean for dealmakers? On the buy side, for example, assessing digital risk might involve looking for evidence of a data breach or current cyber vulnerabilities both in the target business and within its supply chain. This can be carried out via an outside-in cyber risk assessment, which looks for evidence such as open connection ports or sensitive company information being made available on the dark web. From a performance perspective, a buyer will want to understand if the business’s systems are resilient and able to handle organic growth as well as any future acquisitions.

For sellers

On the sell side, the priority is to maximize possible returns by providing a picture of the entity’s robust and resilient digital assets and capabilities. This means it is an imperative to understand and address any system vulnerabilities that might lead to a buyer reassessing the value of the entity they’re intending to purchase. This work really matters when it comes to the bottom line. It’s reported that back in 2017, Verizon renegotiated the purchase of Yahoo, wiping US$350 million off the purchase price because of two big data breaches the previous year.

Unlocking hidden value

This isn’t just about protecting the potential downsides. Increasingly, it’s the intangible assets like intellectual property – which often exist digitally in areas like data, source code and algorithms – where the bulk of the value lies. Carrying out the right sell-side preparation and positioning intellectual property as a value driver early in the M&A process can contribute to shift a company’s valuation by as much as 10-15%. If looking at a business with a billion-dollar valuation for example, could mean an increase of as much as US$100-150 million on exit.

Sell-side preparation involves capturing the intellectual property assets, including trade secrets which are often a source of hidden value, and developing the market narrative to provide for investment bankers and potential buyers. Digital M&A tools can benchmark patent assets against competitors and highlight their relative quality and alignment with the business.

Taking due diligence to the next level

As businesses across every industry look to accelerate their M&A strategy through digital, the evolution of deal diligence needs to understand the value, risk and performance of intangible assets such as technology, intellectual property and data, addressing such questions as: Is the software robust and scalable? Do IT systems have technical debt? Is the data collected and managed in the right way? How unique is IP in the market and is there competitor risk?

It’s why dealmakers should be leveraging digital M&A tools to give themselves the best chance of identifying the best deals with precision and pace, reducing execution risk, whilst creating long-term value for investors and shareholders.

For more detail on digital risk in the deal process as well as the latest on other M&A trends in areas like ESG, SPACs and transaction insurance, download Aon’s latest C-Suite Series M&A report – Better decisions for deal value: Optimising transactions with enhanced insights.


Ian McCaw
Head of Digital M&A, EMEA