The Technology Revolution Drives Transactions

D&I Quarterly Q1/2017

Posted on

13 Apr

2017

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Dittmar & Indrenius > Insight > The Technology Revolution Drives Transactions

New World Order

Companies are facing revolutionary changes. The rise of digital technology platforms, such as Google, Facebook, Uber and others, has given many companies a lot to digest. However, the development in technology is only the beginning; the real revolution lays in the business models and ecosystems that are built around platforms. Platform ecosystems can be seen as the bedrock of new value creation in the digital economy and they will redefine the future of all industries1. As a platform gains more users, other businesses looking for access to new customers may congregate around it. These other businesses will integrate their services with the platform leading to an intense snowball effect where the companies can collectively achieve much more than by acting alone. The inconvenient truth is that platform-based business models provide superior paths to growth and companies that fail to adapt to these new models may face a threat to their continuation.

Old Dogs – New Tricks?

Also companies in more traditional industries are preparing for the platform economy2. For example, in 2016 General Motors invested USD 500 million into Lyft, a US-based ride-share company and a rival of Uber. Another great example is Wal-Mart’s recent USD 3.3 billion acquisition of Jet.com Inc, a US-based e-commerce start up known for its platform. In Finland, Nokia Corporation’s recent EUR 350 million public tender offer for Comptel Corporation, a listed Finland-based provider of a platform to deliver digital and communication services, can be seen as a strategic move towards a platform ecosystem. The acquisition helps Nokia in its pursuit to sell more services and software instead of network-equipment and to create a standalone software business, which will focus on enterprise software and platforms for Internet-of-Things.

Are You the M&A Steamroller?

When a new technology (not to mention new economy) threatens to roll over you, you’re either part of the steamroller or the road. New platform ecosystems may be small, but there is only a limited window of time for companies to come up with a strategy on how to gain access to them. A ‘wait and see’ strategy is potentially dangerous and companies pursuing such strategy are at risk of falling behind and finding themselves forced to make rushed – and usually less successful – decisions.

The acquisition of technology assets has surged in importance as a top strategic driver of M&A3 and its role will become all the more crucial as companies in traditional industries have to adapt to the cataclysm that digital platforms will create. Companies can build their platform capabilities through acquisitions targeting promising technology companies. But before rushing to acquire that promising Palo Alto startup, it may be worthwhile considering the following points:

1Due diligence scrutinising IP, data protection and cybersecurity issues plays a major role, as these aspects have become crucial factors in a target’s value. Since the exclusive ownership of software IP can be essential, all third party dependencies must be identified. The platform has to be safe for other businesses in order to attract them, which underlines the importance of the target’s digital resilience and cyber readiness. Additionally, seller’s warranties may be virtually worthless if the target proves not to be the sole owner of the desired technology. Unnoticed data protection issues may in turn collapse the value of the target and prevent scalability. In addition, it goes without saying that technological due diligence is a must.

2Platform-based businesses are creating new regulatory challenges to lawmakers and legislative changes may pose material risks that a buyer needs to understand. A developer of a platform, or any technology, may not have evaluated possible regulatory risks which can materialize e.g. in the areas of employment and tax regulation.

3Although acquiring an own platform through M&A may be the fastest solution, many businesses may find cooperation-based deals, such as joint ventures and licensing arrangements more useful. As the pace of technology development gets more intense, the value of owning an asset that quickly becomes outdated might be limited. However, cooperation based deals come with their own set of risks and challenges which must be diligently assessed. These issues often relate to formality of the structure and development of technology arising from jointly held IP.

Businesses are on the verge of a new era. Although platforms are causing a paradigm shift in how business is conducted, adapting to them does not necessarily mean abandoning your existing business model. The old and new models may complement each other. A key observation is that companies should come up with a strategy for building a foundation for their future platform-based business – the emergence of which seems inevitable. Having a platform strategy and implementing it successfully is one of the main elements in a company’s future success.

Key Insights

Building the basis for your own platform-based business entails many challenges. Here are key takeaways to keep in mind when building your company’s digital future through transactions.

  • Don’t be a drifting raft. Have a strategy how to systematically build your capabilities to integrate your business with a platform-based business model.
  • Get your due diligence right from the start. Rigorous due diligence is essential. Cyber security, IP and data protection related issues merit special attention.
  • Be prepared. Understand and be prepared for the regulatory risks that new unconventional business models may create.
  • Be dynamic. M&A is not a cure-all, consider also other options.

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