Since practically every business has made digital transformation a major goal, there is intense rivalry to acquire and partner with the top technology and digital startups. A merger can assist a traditional company to outperform its rivals and develop better products, build stronger relationships with customers, and expand its market reach.
However, finance is not necessarily king for the hottest technological companies in today’s busy M&A and venture investment market. Instead, it seems that the factors that can “seal the deal” include a partner’s capacity to develop the firm swiftly as well as their access to markets, knowledge, and resources, as well as their entrepreneurial spirit and shared vision.
So what’s the big deal?
Companies may need to be ready to defend their selection over a wide range of alternative bidders, regardless of whether they go for M&A, other forms of commercial and revenue arrangements, or joint ventures. “The best digital companies are not in search of a savior, just the opposite. Suitors must compete and make a convincing case that they are the partner best able to lead the company to greater success,” remarked Barak Ravid, leader of the EY-Parthenon in America.
These coalitions can very readily fall apart. What once seemed like an ideal marriage can fall apart due to unforeseen difficulties. Different cultural perspectives, communication issues, an inability to reach consensus on goals, and the inability to expand pilot programs are just a few of the challenges.
Before agreeing to a merger or partnership, prospective bidders and tech businesses can assess a number of important factors.
What tech companies desire
“Digital startups and leading tech companies are clearly in the driver’s seat right now,” says Sri Prabhakaran, principal of EY-Parthenon. “It isn’t enough to say, ‘here’s the product plan,’ or ‘here’s what we can offer you.’ Tech targets are looking at which companies have a vision for how the partnership will impact an entire industry and ecosystem.”
In one instance, a significant health care provider was successful in persuading a technology provider that their partnership might alter health care by utilizing digital technology to enhance patient care and reduce costs, ultimately transforming the sector and benefiting society.
Another crucial issue is governance. Although early governance alignment is frequently seen as red tape and bureaucracy by entrepreneurs, it can be crucial to establish trust and forge a long-lasting connection.
How suitors can evaluate technology companies
Despite the fact that technology suppliers are in high demand, businesses should not be too enthused that they neglect the following crucial concerns when analyzing possible targets:
- Product architecture and hosting- To ensure that developers create a reliable product, buyers can carefully assess the technological stack, suitable use of architectural patterns, governance surrounding third-party or open-source software, and overall architecture. In one case, due diligence was performed by a company that was able to locate $100 million in one-time platform upgrading expenditures that ultimately put the deal in jeopardy.
- Product capabilities and a road map should be carefully reviewed and compared to the necessary capabilities. An analysis of how the target’s road map compared to existing capabilities in a recent deal revealed an 80 percent shortfall, or a gap that would require a lot more money and work. The agreement was ultimately ruined by this discovery. A road map must incorporate actions to fulfill the long-term vision in addition to addressing the company’s immediate needs (12 to 18 months out).
- Taking an ecosystem perspective- Creating a portfolio of technologies and intellectual properties (IPs), early IP sharing, and determining who contributes what to the table can all be important steps in identifying all partners necessary to fulfill digital goals.
- Organization engaged in research and development (R&D)- It is possible for there to be cultural disparities between the teams when R&D organizations are combined. However, managing these discrepancies can be aided by setting up the appropriate incentives and operating strategy. The following factors should be considered when evaluating an R&D organization: personnel, roles, location, pay, experience levels, attrition rates, and total R&D expenditure.
Companies can accelerate efforts for digital transformation and gain a competitive edge by acquiring or partnering with “best-in-class” technology companies. However, in the competitive M&A and funding market of today, closing the deal can be more challenging. Companies may need to present a value proposition that goes beyond a particular product or service offering if they want to succeed.