The Changing Rules for

Digital M&A

Companies are turning to M&A to get ahead of digital

disruption in their industries. Winners know they need
to alter their approach.

By Arnaud Leroi, Laura Miles, Elizabeth Spaulding and Laurent-

Pierre Baculard
Arnaud Leroi is a Bain & Company partner based in Paris and a leader of
Bain’s M&A practice in Europe, the Middle East and Africa. Laura Miles is a
partner in Atlanta who leads Bain’s Global M&A practice. Elizabeth Spaulding,
a Bain partner in San Francisco, leads the firm’s Global Digital practice, and
Laurent-Pierre Baculard is a Bain partner in Paris who leads the firm’s Digital
practice in Europe, the Middle East and Africa.

Copyright © 2017 Bain & Company, Inc. All rights reserved.

 The Changing Rules for Digital M&A

As companies turn to M&A to help them deal with the on the importance of articulating a clear digital strategy
mounting pressures of digital disruption, they’re dis- as part of overall corporate strategy. Half of the execu-
covering the many daunting ways that digital M&A is a tives cited the need to nurture and mobilize a set of
different beast than traditional M&A. specific digital experts, either internal or external and
well-integrated into the industry digital ecosystem,
Among the causes for concern: the forward-looking when performing due diligence on a target. Half of
approach to due diligence and the financing methods them also agreed on the need to enhance cultural inte-
and valuation multiples required for digital assets, not gration practices to preserve and develop a digital tar-
to mention the questions regarding how to integrate them get’s entrepreneurial culture, including anticipating
without destroying what the acquirers just bought. cultural challenges as early as the due diligence phase.

When we recently interviewed top M&A executives These executives echo what we counsel companies.
in Europe about their experience, fully three-quarters Indeed, companies that do the best job of adapting to
of them said that digital disruption has had a relatively the unique characteristics of digital acquisitions will
large impact or even requires a complete overhaul of more successfully build these and other capabilities if
their M&A strategy (see Figure 1). These executives they hope to outpace competitors in the digital trans-
readily admitted that they have a lot to learn. “Simply formation of their industry.
put, we don’t know what we don’t know,” said one executive.
In fact, only 11% described themselves as being either Some executives instinctively believe that a single
“mature” or “advanced” on the learning curve. acquisition of a digital player will transform their busi-
ness to deliver the digital part of their corporate strategy.
What will it take to adapt their M&A approach to digi- But from our experience, that’s simply not the case. In
tal? The interviewed executives overwhelmingly agreed fact, the best companies acknowledge that their first

Figure 1: Companies are in the early stages of understanding digital’s impact on M&A

Most respondents recognize digital is changing M&A Respondents highlight critical success factors
and feel unprepared for digital M&A

Percentage of respondents Top three success factors among all cited, by frequency

100% Articulate a clear digital strategy as part of overall

Number of mentions 14
corporate strategy
2−Small impact
Mobilize set of digital experts, either internal
80 1−Early on the 7
or external
learning curve
Enhance cultural integration practices to preserve
7
60 target's entrepreneurial culture
3−Relatively
large impact Cascade digital strategy in both organic and
6
inorganic levers
40
2−Some progress
along the learning Understand where digital approach could
3
transform operations and business model
curve
20
4−Requires a Develop dedicated valuation methodologies for
3−Quite mature on the 3
complete overhaul digital M&A
learning curve
0 4−Well-advanced on the Develop specific merger integration approaches to
learning curve 3
On a scale of 1 to 4, On a scale of 1 to 4, use digital acquisitions to accelerate transformation
how much has/will the how far along the
Equip investor relationship management with right
digital disruption learning curve is your communication tactics on how company is 2
impacted/impact your company in under- embracing digital
company’s M&A approach? standing how to best
operate in digital M&A 0 5 10 15
Source: Bain & Company Digital M&A survey, November 2016

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The Changing Rules for Digital M&A

digital acquisition may actually be less accretive, if not consider only M&A that will bring them to scale for
dilutive. Instead, they prepare themselves for a series digital capabilities or help them accelerate their digital
of organic and inorganic moves. They guide their inor- transformation. Yet in rare cases, it makes sense to
ganic efforts with a well-devised approach that is both make smaller acquisitions in order to experiment or to
consistent and repeatable across all four steps of the generate marketing insights on the future evolution of
M&A value chain: M&A strategy, corporate financing, the business.
due diligence and merger integration.
Companies can ask themselves a series of basic questions
Frequent and material acquisitions are proven ingredi- when performing their M&A strategy in the digital world:
ents for success, based on Bain & Company’s long-
term research on M&A performance as measured by • Are we considering both defensive and offensive
total shareholder return. However, for digital M&A, a digital M&A moves?
consistent and repeatable approach becomes even
more important. Why? Not only are the rules somewhat • Are we adopting a forward-looking and value-based
different for digital M&A, but you’re also likely to be approach to screening attractive digital targets for
paying an even higher premium for your acquisition, our business?
betting on a fast—although uncertain—development.
• Do we clearly understand how digital fits into our
Let’s look at the four critical steps one by one. strategy, and do we strive to be a thoughtful parent for
the acquired digital company and its legacy business?
M&A strategy. We find that the best companies are
extremely clear about how digital M&A will enable • Are we modifying our approach with incremental
their strategy. Publicis Groupe acquired Sapient for investments that mitigate risks?
$3.7 billion in 2014 to spur a digital transformation of
Corporate financing. Many companies think that digi-
its core business. This was a material acquisition for
tal assets are too expensive. Determining the right val-
Publicis, intended to accelerate its transformation to a
uation starts by understanding how the acquisition will
digital advertising agency and gain scale against growing
impact the growth-value profile of their stock and equity
competition from Google and Facebook. Publicis now
profile. The ultimate goal is to signal to the market that
achieves 50% of its revenue from digital—that’s ahead
the digital acquisition is not just a one-off acquisition,
of its 2018 target—and offers a best-in-class digital platform
but rather part of a series of organic and inorganic
for client interactions, among other significant benefits.
moves that feed into the firm’s corporate strategy and
Sapient was not the first digital acquisition for Publicis, help it adapt and win in the digitalization of its industry.
and it will likely not be the last. Again, consistency and This will help influence the evolution of the company’s
repeatability are key success factors. M&A strategy is market perception and its price-to-earnings (PE) ratio.
not a one-time solution, but rather something that
Higher or different valuations usually can be associated
should be an integral part of your global growth strat-
with three types of deals: acquisitions for critical shape-
egy. Companies pursuing such gains need to start by
shifting capabilities required to bring the acquirer up
evaluating how digital has distorted the value chain of
to digital grade; acquisitions in areas that evolve the
the industry, then determine the specific ways that
acquirer in strategically valuable technology such as
M&A would help deliver on that unique strategy—
cybersecurity, artificial intelligence, the Internet of
for instance, enabling customer digital engagement,
Things or analytics; and acquisitions that significantly
reshaping operations, or protecting against digital dis-
scale up the size of a customer base that can almost
rupters’ business models. Because deals are time-
immediately create a winner-takes-all situation, dis-
consuming and often difficult, most companies should
placing the competition. These acquisitions support

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 The Changing Rules for Digital M&A

future equity value, and companies should consider al- increasingly be captured in Thales’ PE ratio and overall
locating the affordable price premium to such deals. valuation, helping to attract growth investors. In fact,
by the end of December 2016, Thales traded at a 21.8
Another thorny issue: how to finance the deal. Because PE multiple, a 15% premium over the aerospace and
targets tend to be expensive, acquirers are limited in defense industry, which averaged 18.9.
their ability to use stock, as the dilutive effect for existing
shareholders would be too high. But acquiring a risky Due diligence. Digital M&A turns traditional due dili-
digital target in a 100% cash deal may expose the com- gence on its head. For instance, to get a good valuation,
pany to overvalued goodwill and future write-offs. To companies need to screen a target before value has
mitigate the risk linked to the target’s high multiples, actually been monetized. Also, how should an acquirer
acquirers need to evaluate all potential financing solu- compensate for the lack of financials?
tions, considering adapted payment terms such as
earn-outs or other deferred payment mechanisms.

There are exceptions. In rare cases—and for defensive Consistency and repeatability matter.
reasons—it makes sense to consider major dilutions
and to break the piggy bank to take control of a major When a company transforms its equity
digital disrupter. Facebook adopted a “users first, profile to become a more legitimate digi-
profits later” mindset in its $19 billion acquisition of
WhatsApp, a defensive move that positioned Facebook
tal player, it can gain more flexibility in
as the world leader in messaging. The price tag for how it finances future deals.
WhatsApp seemed high, given its lack of financials.
But Facebook based the valuation on WhatsApp’s rapidly
expanding base of users rather than on financials. The
company paid $42 per WhatsApp user, compared with In traditional due diligence, much of the effort involves
its own valuation of $144 per Facebook user at the time evaluating a target’s past business performance and
of the deal close, and executives viewed the acquisition current competitive position. In digital M&A, acquirers
as mission critical for the company’s strategy. need to become more forward-looking, possibly
through approaches that evaluate the potential success
Again, consistency and repeatability matter. When a of the business model under different scenarios. The
company transforms its equity profile to become a best companies build and manage a community of
more legitimate digital player, it can gain more external experts to become connected to the digital eco-
flexibility in how it finances future deals. system of which they are a part—or of which they want
to be a part—and heavily rely on those experts to support
Thales purchased growing cybersecurity firm Vormetric diligence in areas that are hard to assess objectively.
for $400 million, which was 5.7 times Vormetric’s
sales. The acquisition communicated to the market Due diligence in digital M&A calls for paying extra
that Thales was shifting its financial profile to the high- attention to certain considerations. Is the acquirer
growth business. Vormetric’s advanced technology capable of becoming a strong corporate parent, suited
commands gross margins of 80% to 90%. At around to accelerate the development of the digital acquisi-
25% year-over-year gains, cybersecurity sales growth is tion? This is something to determine independently of
expected to significantly outpace Thales’ core business, the value of the digital acquisition in transforming the
resulting in an increasingly positive impact on the acquirer’s own core business. Another important question:
overall financials. Our research suggests that, over How scalable are the acquired assets in terms of people,
time, Thales’ organic development strategy, supported technology and business models?
by multiple acquisitions in the cybersecurity space, will

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The Changing Rules for Digital M&A

Leading acquirers rely on digital tools to complement We also advise our clients to consider tactics to enable
their traditional sources of information. For example, some a smooth integration, including cultural exchange pro-
use tools that can assess the perception and market grams between the companies and incorporating digital
recognition of the target. For sector and company acquisition leaders in their key governance forums.
screening, data provider CB Insights helps develop Digital day-one integration teams are also critical to
information-rich company profiles, visualize competi- ensure that the combined company is prepared with an
tive dynamics and uncover nonfinancial performance integrated digital strategy.
metrics. For diligence into a particular company, web
scraping provides indicators of market share and While almost 90% of digital M&A can be considered
growth momentum such as web-traffic analysis, social scope deals that will require only selective integration,
media engagement metrics, and geographic coverage vs. in our experience some situations call for a more com-
competitors over time by extracting location websites. prehensive integration of the two companies. For
instance, it likely makes sense to fully integrate the two
Acquirers may also turn to Glassdoor or LinkedIn to companies when your company faces a major business
assess the culture, or rely on tools that provide insights model disruption linked to digital, and you have
into the operating model of the acquired company— already done several acquisitions in the specific digital
moves that help them mitigate potential integration is- area. One strategy: Consider a reverse takeover approach
sues. Cultural risks are particularly vexing, and many in which you give leadership of the digital acquisition
companies have demonstrated how easy it can be to business functional responsibility for the entire com-
destroy digital assets in just a few months. By making pany to spur your transformation. When Publicis acquired
a thorough integration assessment part of due dili- Sapient in a transformational deal, it gave Sapient’s
gence, companies can avoid unpleasant surprises. executives the keys to the car. It also created Sapient
Inside, a network of Sapient digital specialists who will
Merger integration. When Microsoft acquired LinkedIn help its traditional advertising agencies benefit from
for $26 billion in 2016, one of the goals was to inte- best-practice methods and tools.
grate product offerings while preserving each company’s
unique identity. After the deal announcement, Micro- Digital disruption will only intensify. As it does, com-
soft’s CEO announced that LinkedIn would be kept auton- panies in all industries will increasingly consider M&A
omous, but Microsoft engineers would be tasked to see as a way to adapt. But success requires a clear under-
how they could innovate with this new asset. standing of the changing rules for digital in M&A strategy,
corporate financing, due diligence and merger integra-
In our experience, the best companies pursue a “scope” tion to help companies stay a step or two ahead of the
deal mindset rather than a “scale” deal mindset with competition. As is often the case in this digital world,
digital acquisitions. (Scope deals expand a company’s most successful companies will learn by doing and
scope by adding new customers, products, markets or implement a feedback loop on their early digital M&A
channels. Scale deals grow a company’s scale by add- deals. They will lead a significant evolution of their
ing similar products or customers.) That means investi- M&A skills and processes, making them consistent
gating where each company can benefit from the other to and repeatable capabilities for the future.
accelerate transformation from technologies, customer
proximity, go-to-market access and other capabilities.

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 Key contacts in Bain’s Mergers & Acquisitions and Digital practices

Europe, Arnaud Leroi in Paris ([email protected])

Middle East Laurent-Pierre Baculard in Paris ([email protected])
and Africa

Americas Laura Miles in Atlanta ([email protected])

Elizabeth Spaulding in San Francisco ([email protected])

For more information, visit www.bain.com