You Acquired a Shiny, New Technology Company, Now What?
Mergers and acquisitions help many organizations accelerate digital transformation through the acquisition of new products/services, technology, processes or talent. For example, McDonald’s recently acquired the machine learning start-up Dynamic Yield for $300M to scale their use of machine learning technology and improve the customer experience.
While there is nothing new about large corporations acquiring small specialist products or capabilities; these “digital M&A” deals are often different because:
- The acquirer is typically a more traditional business
- It’s not a “mega” deal, but more likely a small acquisition of a start-up or growth stage firm with an enterprise value of few hundred-million dollars
- The motivation isn’t always about the products or capability but about the brand, culture, ways of working, processes and experiences
- The acquisition is being used as a vehicle to accelerate business transformations, though has little in common with the acquirer
The target acquisition company is likely to be less than 10 years old and has “grown up” in the digital age. Its business model, processes and structure are much more likely to look like a “lean startup” business and has never operated outside those principles (e.g., customer focused, data driven, empowered decision making, rapid/iterative product development and innovation).
Typical Integration Approaches Will Prevent Maximum Value Capture
The traditional approach to M&A, with its focus on integration and synergies, was designed to extract value from an acquisition, not to enable transformation of the acquirer (by the digital characteristics or products of the target company). The traditional “victor” approach risks damaging three of the most valuable aspects of the digital acquisition: people, customers and growth.
The employees of targeted small technology firms have been part of a rapidly growing start-up company with a distinct culture and ways of working. They are committed to the culture and company, and proud of what they have accomplished. Yet, after an acquisition, only 36 percent of founders expect to stay at their company (CBInsights, 2019) and 33 percent of employees will have left within a year (Kim, 2018). This attrition is value destructive in two ways:
- These employees are the talent who created, and knew how to operate the value, that was acquired in the company.
- The people are often the types of new thinkers and cultural change agents that are key to helping the acquirer pivot into a more digitally-enabled organization.
Describing these differences simply as a culture fit issue understates the challenge. These differences are deeply embedded in processes, organization and behaviors – even technology choices (pretty much the whole business model). A rapid flight immediately caps the value creation potential of the deal by stunting the acquirer’s ability to learn from and be more thoroughly transformed by the new, digitally-centered team.
The merger or acquisition will undoubtedly result in changes to the customer experience. Sometimes these changes can seem relatively trivial (minor billing changes or web page navigation) while others are more significant (new pricing structures or sales relationships). Big or small, changes in customer experience are magnified in the context of digital acquisitions.
These companies have been built from the market back, products of fierce customer obsession and rapid, often daily (or even hourly) updates to products or service experiences. Even the slightest variation, like slowing the release of new updates or adding a new approval layer, can reverberate negatively with customers that have come to expect a more frictionless experience.
If not managed carefully, changes that impact customer experience can cause customers to look for alternatives, taking with them not only revenue, but the types of engagement, feedback and insight that are components to driving broader digital transformation.
When working on “digital” mergers and acquisitions, we find that the primary driver is to drive significant growth. This is atypical to most M&As which tend to be focused on finding cost synergies.
As a result, the post-merger integration that is applied to the acquisition is biased heavily towards the identification and realization of cost synergies in technology, finance and operations. This “traditional” integration methodology was never designed to drive growth, and it certainly was not designed to consider brand, customers and a digital operating model.
Four Integration Actions to Create Value and Ignite Business Transformation
To maximize the full value of your next small digital/technology acquisition, make sure your integration process preserves, and is ultimately transformed by, the full assets of the firm – it’s people, customer relationships and operating models. There are four integration actions that will help you preserve these assets:
Consider Brand and Customer Experience Early and Often
Ensure all functional discussions include conversations around customer impact and set the precedent that customer impact and experience is a priority. Assess how the integration is impacting your customer experience in terms of disruption and potential opportunity from initial deal planning through to deal close. You should leverage your existing customer journey maps to assess the potential impact. Consider creating a standard set of journeys that you can show side by side between yours and the acquired company’s customer journey to define a future consolidated journey.
After deal close you may want to discuss details of the acquisition with your largest and most strategically important customers (particularly the key customer of the acquired firm). For you own customers, this provides a great opportunity to discuss what it could mean for them and how they could benefit from the new products or capabilities.
Broaden Your Culture Assessments
Standard culture assessments help businesses understand the broader cultural and ways of working differences between the two organizations, but rarely provide enough insight into how the cultural differences will impact the ways of working. Nor do they place an emphasis on what the acquirer can or should do for the acquired business. You should broaden your culture assessments to identify key processes where digital capabilities are likely to have high impact such as product development, experience, marketing and sales.
Quickly Integrate New Talent
The most effective ways to integrate the new organization and accelerate your digital journey is to quickly include talent from the acquired digital organization. You can do this in two ways:
- Look for individuals who you could move into your existing digital transformation program or team.
- Place one of the digital founders into a leadership role within your organization where they will be a significant stakeholder for your digital transformation activities.
You will need to reshape incentives and governance across the enterprise to meet and support the expectations of your new digital-first talent and start to change the behavior of your existing talent. In addition, you will need to help reskill your existing workforce so they can play well with their new digital native colleagues.
Shake Up or Test New Operating Models
Acquiring a new company provides an opportunity to shake up your existing operating model. Examine a few areas of the operating model where characteristics of the acquired business might help you move toward a more evolved digital enterprise. For example:
- Governance: Does the acquired business have greater delegation in decision making which could help improve agility in certain more innovation driven functions?
- Product: Is their product development process using customer feedback more effectively to drive higher customer satisfaction?
- Measurement: Are their KPIs more consistent with digital products, and therefore driving improved performance?
- Service: Do they have a stronger service and customer first culture which improved customer retention and loyalty?
- Data: Are decision-making processes based on data or more effective?
Digital mergers and acquisitions create a specific set of challenges that force us to think differently about our integration methodology. Given the rapidly changing world, and increased emphasis on growth, companies that embed digital transformation principles into their M&A integration process will driver higher returns on future digital M&A.
For more information on capturing greater value in the M&A, please get in touch.