13 June, 2017
The growing importance of technology as a strategic driver of M&A activity and a linchpin for effective post-deal integration raises the strategic profile of the CIO.
A dramatic uptick in domestic M&A since October could signal the reversal of the deal slump that dominated most of 2016. According to Deloitte’s M&A Trends Year-End Report 2016, a survey of 1,000 corporate executives and private equity investors, M&A activity is poised to accelerate, perhaps significantly, in 2017.
Seventy-five percent of survey respondents expect deal activity to increase and 64 percent expect the average transaction size to grow in 2017. Divestitures may be a major focus, as 73 percent of survey respondents say they plan to shed businesses next year—up from 48 percent in the 2016 M&A Trends Mid-Year Report.
Why the expected surge in M&A and divestitures? Stock prices have reached record highs, interest rates remain at or near historic lows, and corporate cash reserves have consistently increased over the last several years. Sixty-five percent of survey respondents (up from 58 percent in the mid-year 2016 survey) say their cash reserves have grown, and 43 percent say they intend to use those cash reserves for new deals (up from 30 percent in mid-year 2016 and 26 percent in 2015).
Survey respondents cite industry convergence as a key trend influencing M&A. As technology firms build cars, and retail stores sell financial services, respondents are nearly unanimous in anticipating industry convergence to continue to be a trend during the next two years; only 1 percent disagree. Furthermore, respondents most often identify technology as the industry most likely to converge with their own—26 percent of respondents declare it their top pick.
Several strategic business imperatives, including the acquisition of technology assets, are encouraging interest in deal making (Figure 1).
Please clik on the image to enlarge.
In fact, acquiring technology assets has surged to a virtual tie (with expanding customer base in existing geographic markets) as the No. 2 strategic driver for M&A, more than tripling in importance since the mid-year 2016 survey. Expanding product offerings or diversifying services ranks as the top strategic driver of M&A strategy.
As acquirers consider strategic technology purchases, CIOs can help guide an appropriate preliminary bid by determining the potential value of an M&A target’s proprietary technology. They can assess such factors as its functionality, scalability, maintainability, reliability, risk, and security. By bringing CIOs into deal planning early, companies can avoid rushing or short-changing the due diligence process, which reduces the risk of post-closing surprises. Such an approach also can help companies meet critical Day One integration objectives and achieve long-term integration goals.
IT integration is almost always the largest integration challenge in any deal and is typically the largest cash expense. In fact, corporate survey respondents consider effective integration the top factor in achieving a successful M&A transaction, with about 22 percent ranking it as most important (Figure 2).
Please clik on the image to enlarge.
Indeed, poor integration is one of the top reasons acquisitions fail to generate expected value. Eighty-four percent of all respondents say at least some of their 2015 and 2016 deals didn’t generate the expected value or return on investment, and 78 percent identify failure to effectively integrate as one of the reasons deals fell short of expectations. Respondents from technology firms are most inclined to believe that execution and integration gaps are the main reasons for underperformance in past deals.
CIOs can help companies create a smooth Day One experience that includes merged email addresses and phone accounts. In the longer term, CIO expertise is valuable for ensuring continuity of key customer, financial, legal, management, and regulatory systems and for overseeing large-scale process and system changes.
Technology’s dual role in M&A activity gives CIOs the opportunity to be an early and active participant in the M&A due diligence and integration planning processes. Because technology is both a strategic driver of M&A and one of the keys to a successful integration, CIOs’ support includes assessing the value and viability of prospective technologies and planning and managing the integration of applications and infrastructures.
This article was first published in the Wall Street Journal. Please click here for the article.
See also link to the original source here.
For further information, please contact:
Cody Chen, Partner, Qin Li Law Firm, a Chinese law firm and a member of the Deloitte Legal global network.
codychen@deloittelegal.com.cn
Mark Schroeder, Qin Li Law Firm, a Chinese law firm and a member of the Deloitte Legal global network.
marschroeder@deloittelegal.com.cn
