Industrial companies have been acquiring technology businesses at a greater rate than any other industry group for the last five years. While companies are racing to getting these cross-industry deals signed, the real challenge lies in integrating the business.
To realise the technology deal’s promise and capture its true value, successful acquirers are throwing out their traditional playbooks and following a select few key principles to avoid smothering the target while unlocking its potential.
In this new KPMG report, From industrial to digital with M&A, we argue that while technology businesses present a potential for outsized returns, these acquisitions present a different and more complex set of integration challenges than their more traditional within-industry counterparts.
Challenges tech deals bring to the M&A table
While any deal can suffer from a one-size-fits-all approach integration, technology acquisitions tend to be at higher risk of being suffocated by traditional playbooks. Successful integrations prioritise workstreams based on expected value. For instance, commercial and product integration would take priority over back-office consolidation in a tech deal predicated on revenue synergies.
Existing customers may be sceptical about potential reliability and added value in cases where the technology is customer-facing. Successful integrators anticipate this and proactively educate the customer by emphasising the new offering’s value rather than its features. Subscription-based pricing models present another customer adoption hurdle, and integration teams must develop a pricing approach that is representative of a cohesive offering.
Deal teams are at risk of setting stretch targets without sufficient pressure testing from regional, business unit and commercial leads. A proper bottom-up build can mitigate the risk of a failed transition of ownership from the deal team to the commercial team.
Tech companies are known for having inherently less bureucracy, more innovation and quicker decision-making in their culture. Industrial companies positioned to pay the transaction multiple demanded by these companies tend to be the opposite. To promote continued innovation, acquirers should invest in culture assessments to understand where to assimilate cultures or allow a period of incubation.
Titles and equity are two “me issues” that presented a heightened risk of attrition with tech companies. These companies tend to be more generous with lofty titles than their large industrial counterparts. Matching compensation thus becomes a delicate exercise in part because tech employees may see their current shares as more valuable independently.
How industrial players can get tech deals right
Given these transactions’ unique complexity and risk profile, savvy acquirers are substituting their traditional integration playbooks with a more fit-for-purpose approach based on the following key principles:
• Integrate selectively to minimise disruption and preserve value
• Pursue alternative deal structures and partnerships to minimise risk
• Lean in on revenue synergies to stretch beyond targets
• Make engineers, salespeople, and culture leaders a priority
• Expand diligence focus to commercial, software and product integration
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