- 90% of companies are focusing on digital priorities in their capital allocation
- Only 48% believe they have a coherent ‘buy and build’ approach to digital
- 46% say their due diligence is not highly effective for digital M&A
London, UK (Jan. 30, 2018) – Businesses continue to transform through technology, but many are challenged to fully realize their digital vision, according to the EY Digital Deal Economy, a survey of more than 900 corporate executives across nine major industries in 26 countries.
Responding to the rapid pace of technological advancement, the vast majority of respondents (90%) are allocating capital to digital transformation. Successful transformations will be those that strike the right balance between building digital capabilities in-house and buying innovation and technology to create change faster than organic growth can ever achieve. However, less than half (48%) of corporates believe they have a coherent ‘buy–build’ approach.
“Buying intellectual property, innovation and talent to fuel digital transformation is a fundamental cornerstone of today’s M&A market,” says Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services. “If companies are to create a better digital tomorrow for themselves and their various stakeholders they will likely need ‘buy’ as well as ‘build’ strategies to deliver the required results. Today, investors are prepared to reward companies that make catalytic technology and transformational acquisitions.”
Many are dealing in digital, but processes need updating
Almost three-quarters (74%) of companies are looking at inorganic routes to growth through acquisitions, alliances and joint ventures. In terms of achieving deal success, many show reservations about their current practices, with just under half (46%) claiming their due diligence processes are not ‘highly effective’ for digital acquisitions.
“Digital M&A is still a relatively new phenomenon and the majority of companies are not adopting innovative deal processes – from cyber and technology diligence to IP review – required to ensure successful acquisitions,” says Tony Qui, EY Global Chief Digital Officer – Transaction Advisory Services. “We also see challenges around valuations – you cannot apply the same methodology to a ‘clicks and order’ company as you would have done to a ‘bricks and mortar’ business.”
The survey found that just a fifth (22%) of companies are currently undertaking cyber diligence. At the same time, many organizations do not have all the key performance indicators (KPIs) in place to measure post-merger integration – just 34% have processes to evaluate people/culture success such as levels of organizational engagement.
“Managing successful integrations has always been a challenge and companies have long risked losing value in the post-merger process,” says Qui. “The coming-together of traditional and digital organizations, of sometimes completely different cultures, now makes that even more complex. Companies need to address these issues in their front-end deal strategy.”
Strategy and ecosystem vital to fast-track innovation
The survey finds a trend on the rise: digital ecosystems. These are a group of enterprises that interact with each other and share digital platforms to achieve commercial benefits or new innovation. Almost half (48%) of corporates are making significant investments in building their digital ecosystems, while a further 47% are making moderate investments – only 5% of those surveyed are not currently investing in this area.
The most important reasons for building ecosystems, according to those surveyed, are to develop new products or services (primary reason for 34% of respondents), enter new markets (24%), and plug gaps in digital capabilities (23%). Almost a fifth (17%) saw this as a way to defend against a competitive disrupter.
“Establishing a digital ecosystem is critical to fast-tracking innovation, allocating resources and building structures and networks to realize the potential of the digital vision,” says Qui. “The many advantages include a better way to identify promising start-ups via incubations as well as potential sponsorships and collaborations.“
Frequent capital and portfolio agility to underpin ambitions
Corporates are well-positioned to find digital transformation. The majority (82%) have sufficient balance sheet capital for digital M&A goals. Those that do not have access to explore alternative funding through bonds, equity or divestments – selling to raise capital to reinvest.
In terms of the expected benefits offered by capital investments in digital, many respondents perceive transformative potential to boost revenue (61% cite this as expectation); improve cost efficiency (57%), market share (56%) and share price (52%).
Digital maturity – time to follow the leaders?
Overall, the Digital Deal Economy finds three levels of digital maturity among respondents. ‘Aspirers’ constitute the majority (57%) and are challenged by many aspects of digital M&A. ‘Adopters’ (29%) understand where they need to update their approaches for unique digital challenges. And ‘Leaders’ (14%), an exclusive group, who have already undertaken a significant transformation and have fully aligned capital and digital strategies.
“Leaders are ahead of the competition in many strategic, operational and commercial aspects of their digital M&A,” says Krouskos . “That ‘Leaders’ from our survey are more likely to have the CEO driving digital transformation than the broader peer group demonstrates the level of importance those companies are placing on future-proofing themselves for the brave new world.“
View the survey online at ey.com/dde.
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In doing so, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.
About EY Transaction Advisory Services (TAS)
How you manage your capital agenda today will define your competitive position tomorrow. We work with clients to create social and economic value by helping them make better, more-informed decisions about strategically managing capital and transactions in fast-changing markets. Whether you’re preserving, optimizing, raising or investing capital, EY Transaction Advisory Services combine a set of skills, insight and experience to deliver focused advice. We can help you drive competitive advantage and increased returns through improved decisions across all aspects of your capital agenda.
About EY Digital Deal Economy
With traditional companies facing unrelenting pressure to drive digital innovation, the ability to design and execute a digital M&A strategy is essential. EY Digital Deal Economy provides one of the most detailed comparative studies available.
The survey was conducted between November and December 2017 by Longitude. More than 900 respondents across 26 countries and nine major industries participated. C-suite executives involved in M&A strategy or digital strategy were invited to take part.
Respondents were categorized into three distinct groups based on their company’s maturity or preparedness in digital M&A across seven areas of EY Digital M&A framework.
Source: EYTags: Business transformation, Digital Deal Economy, EY, survey