How business buyers’ motivations are changing
Although M&A activity has generally been growing for decades, the motivators behind the deals are changing. We take a look at some of the new reasons why businesses are expanding through acquisition.
The new deal drivers
A number of recent reports and surveys carried out by some of the leading figures in business intelligence have found some notable trends in M&A motivations:
Digital
Perhaps the most notable shift in M&A motivations is the desire to acquire technology assets. A vast number of businesses are increasingly looking to take on tech assets through M&A in a bid to digitalise their operations. Deloitte’s The State of the Deal - M&A Trends 2018 white paper states that 20 per cent of dealmakers cite acquisition of technology assets as the main driver for a deal, up from just 6 per cent who said the same back in the beginning of 2016.
Deloitte’s report stated: “12 percent of respondents cite digital strategy as the driving force behind M&A deals for the coming year; combined, acquiring technology or a digital strategy accounted for about a third of all deals being pursued.”
Accenture’s recent Tech-Led M&A - From Science to Art report also found a major sway towards digital driving deals. Its survey found that 43 per cent of businesses cite acquiring additional digital capabilities as a strategic reason for a purchase.
Using acquisition as a means through which to digitalise a business has become a no-brainer for many. Business owners increasingly view digitalisation as the key to growth. No longer do businesses acquire others simply to generate synergies and add to their customer base, they now realise that technology assets are a must if they are to attract the new business growth that shareholders expect.
As well as changing reasons behind deals, technology is changing the deals themselves, with 84 per cent of purchasing businesses now giving their chief information officers a seat on their M&A board. The traditional approach to M&A is no longer relevant to digital deals and a whole new playbook is being used by many.
An example of a traditional firm adapting its entire business strategy around its latest acquisitions is Ford. The automotive giant has recently purchased tech start-up Autonomic, which offers Transport Mobility Cloud (TMC) software services. Ford has also announced that it is to focus more on services than products in the future and will make this TMC technology available even to its competitors in the future. Through clever strategic acquisitions Ford is carving out a place for itself in the future of the motoring industry. "There is nothing exclusive or proprietary to Ford about TMC," Autonomic’s CEO Gavin Sherry told Business Insider, "that makes it very special and unique within the industry."
Talent acquisition
Some 9 per cent of the executives surveyed by Deloitte said that talent acquisition was the main driver of their dealmaking, up from 4 per cent in 2016. This goes hand-in-hand with the demand for technology assets. Acquiring employees that have expertise in the use of the technology assets you are taking on is a must for any businesses hoping to grow following a purchase.
Obtaining and retaining staff with digital expertise is a lot cheaper and easier to do as part of an acquisition than as a separate requirement on top of an acquisition.
Mid-tier market deals
As well as a move towards digital deals, the size of the deals taking place is also shifting slightly. There has been a growing appetite among corporate buyers for smaller deals in the mid-tier market. Following a period of growth in big-ticket deals, the demand for mid-sized businesses is on the up as they present a greater opportunity for substantial returns over a long period.
When it comes to creating a competitive advantage, buying a smaller or mid-tier business can trump larger deals as they offer opportunities for introducing new products and ideas - often, again, with a nod towards the digital side of business - that can help a business to grow in a way that was not possible before a deal.
General trends
A large number of deals currently being done are larger, more traditional firms acquiring smaller digital businesses that are able to enhance the purchaser’s capacity to compete over the long term. These types of acquisitions are coming thick and fast as we move into a more digital environment.
Smaller, strategic purchases can add between 8.2 per cent and 9.3 per cent to annual shareholder value over a number of years, compared with an average of 4.4 per cent for ‘big bet’ deals, according to research from the Harvard Business Review.
What’s no longer important..?
Despite the continued appetite for expanding customer bases within existing markets (cited by 19 per cent of respondents as the main reason for buying a business), expanding into new geographical markets has remained less important, with just 11 per cent citing this as their main motivation. There are also fewer buyers out looking for a bargain. The Deloitte survey found just 6 per cent of buyers citing a bargain price as a motivator in making a deal.
Conclusion
As the business environment continues to evolve at a staggering rate, particularly with the emergence of new technologies, businesses are more aware than ever of the importance of strategic M&A. A great number of executives claim that there are fewer opportunities for organic growth at the moment. There is also a clear shift towards creating more long-term growth in shareholder value as opposed to an emphasis on generating short-term profit increases. All of these factors, alongside an increasingly competitive marketplace, mean that purchasing firms that can contribute to a business’s digital capabilities through technology and talent is an effective way to stay relevant.
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