This article is based on a panel discussion held at Citi Commercial Bank’s EMEA Digital Leaders Summit 2023 held in Prague in September. Comments have been edited for brevity and clarity.
Growing inorganically has always been a key strategy for technology companies but it’s important to manage the risks, write Yishai Fransis, Head of EMEA Technology Investment Banking at Citi and Piotr Tyminski, EMEA Industry Head of Digital, Tech and Comms at Citi Commercial Bank.
It is widely accepted that at least half of all M&A transactions fail, and some studies suggest more than 70% fail to create value. Moreover, both the macroeconomic and financial market environment has changed over the past 18 months, creating additional potential challenges. Even when M&A transactions are successful, gaining credit for them from investors (for listed companies) has always been tough. Yet if you can avoid potential pitfalls, acquisitions can deliver significant rewards.
What’s the driver?
A key way to help ensure the success of an M&A transaction is to have a clear framework to evaluate the deal. Typically, acquisitions are to gain access to product, technology, talent or new markets – or a combination of these factors. Scale is also an important motivation, as it allows firms to generate cost synergies by sharing resources.
Romania’s largest listed IT company Arobs has completed nine acquisitions since its IPO in 2021. “Our company has two business lines, products and services,” explains Voicu Oprean, Founder and CEO. “For our product business, acquisitions are primarily about achieving a larger footprint so that we can integrate customers onto our platform. For our services business, we look to gain both customers and staff to increase our delivery capacity.”
While some M&A transactions deliver incremental gains, others are part of an overarching strategy to transform the company by adding a series of additional capabilities.
Ivan Jakubek, Chief Strategy Officer of mobility services company EUROWAG says it scrutinised the core services used by truck drivers and transport business owners when designing its M&A strategy. “We saw which services we had in house, which we could build or partner, and which we would have to buy. The transformation of our company, from a narrowly-focused fintech to a comprehensive mobility operation, was driven by addressing transport businesses pain points.”
Navigating today’s headwinds
Over the past 18 months, many economies have faced historically high inflation and interest-rate hikes, which have impacted the availability and cost of finance. Uncertainty has led to a divergence between buyers and sellers when it comes to valuations.
In addition, there has been a change in sentiment towards the tech sector by some investors, which has reset values (though niche assets have held up well).
Given today’s market conditions and sentiment, if you are in the market for an acquisition, you need a clear picture of the target’s value. And regardless of competition for the asset, you should stick to your valuation. Ideally, you should communicate your valuation methodology early on so that both you and the target company arrive at a price that both recognise as fair.
Getting credit for deals
When you do an M&A, and especially if you run a public company, it can be difficult to get credit from investors for the strategic benefits of an acquisition, and its contribution to P&L.
Flemming Pedersen, CFO of the digital sports media group Better Collective – which has executed 32 acquisitions since it listed in 2018 (and has a dedicated M&A pipeline team that meets every two weeks) – says that communicating appropriate metrics to the market should be a priority.
“We tell the market clearly what we are going to do and what the important KPIs are, and then frequently report these metrics,” he says. “Over time, this approach builds trust and confidence that M&A can lift performance.”
In addition, you should clearly articulate how the M&A aligns with your company's long-term strategic goals and vision.
Investors want to know how the acquisition fits into the bigger picture and how it contributes to your growth and profitability. One way to do this is by differentiating between organic and inorganic growth, so that investors can understand the benefits of each strategy. “In our case, while our competitors are swimming in their own line, we are effectively doing a decathlon,” says EUROWAG’s Jakubek. “We are not an M&A machine and we need to explain the story of each of our acquisitions and how they will contribute to overall future growth.”
Focus on culture for success
While M&As sometimes fail because of insufficient due diligence, in most cases much of the success or failure of an acquisition comes down to integration.
Without a well-thought-out integration strategy, you may struggle to realise synergies, leading to operational inefficiencies. Cohesion may also be difficult to achieve. At a simple level, IT issues associated with integrating platforms can be formidable, for instance.
More fundamentally, workplace cultures and values, and management styles may be different, especially if an acquired company is in a different country. Conflicts can create disruptions, lower employee morale, and hinder integration.
Simply overwriting the culture of an acquired company is not the answer: its dynamic may be important to its success. You need to consider the integration of each M&A on its own merits.
Jakubek at EUROWAG says you should spend time getting to know the company, its founders and their culture. “We start talking to companies at least two years before an acquisition completes,” he says. “We want them to want to join us. The sellers should always be on your side.”