M&A For Tech Businesses Is Just Different, Very Different
Harvard Business Review has a great piece on why acquisition of a digital business is like acquisition of no other business.
They argue that everything you know about the acquistion process is a ball and chain when it comes to the acquisition of digital businesses as these businesses do not conform to normal models. Acquirers need to be able to move quickly, assess value before the business has been properly monetised, appraise core assets – like ‘social media traction’ – which are difficult to value objectively, and do all of this without paying in shares for what are higher risk add-ons.
Let’s start with financing the deal. Determining the right valuation begins by understanding how the acquisition will affect your company’s equity profile. The ultimate goal is to signal to the market that the digital acquisition is part of a series of moves that will help you adapt and win in the digitalization of your industry.
Meanwhile, because digital targets tend to be expensive, acquirers are limited in their ability to use stock to finance a deal. The dilutive effect for existing shareholders would be too high. On the other hand, acquiring a risky digital target in a 100% cash deal may expose the company to overvalued goodwill and future write-offs. To mitigate the risk linked to the target’s high multiples, you need to …
When buying a technology business, due diligence needs to take steps in bold new directions. New tools and processes are required to assess the strengths and weaknesses of the business. “Web scraping”, for example, and “social media analysis tools” take the place of analysing leases and supplier contracts.
And integration of a technology / digital business is a different ball game in its own right.
