EY Report - Digital Deal Economy Study
EY Report - Digital Deal Economy Study
EY Report - Digital Deal Economy Study
com/dde
Dealing in
a digital world
Capital strategies to future-proof
your business
The better the question. The better the answer. The better the world works.
2 | Dealing in a digital world
Steve Krouskos
Global Vice Chair
Transaction Advisory
Services
Enabling a digital future requires smart capital allocation. Selecting the right strategic investments
organic or inorganic offers routes to growth. The key question is can companies build the
capabilities required to succeed in the brave new world or do they need to buy?
According to our survey, 67% of respondents see M&A as the most efficient way to get there
acquiring digital capabilities, assets and technologies to bridge gaps and accelerate growth. A similar
number say a rapid response is essential.
However, buying has significant challenges. The digital deal environment is becoming intensely
competitive. The rise in acquisitions is not only coming from technology companies buying within the
industry, but also from strategic buyers of all types as sectors blur. At the same time, considerations
underpinning a deal are becoming more challenging from the valuation of nonphysical digital assets
to the integration of new entrepreneurial cultures into traditional company models.
Other inorganic routes also offer options. Companies are increasingly employing smart collaboration
including alliances, partnerships and joint ventures, throughout their value chain. This enables
companies to fast-track the build-out of their digital capabilities to remain competitive.
Ultimately, achieving digital transformation involves strategic questions that are many and highly
complex. What to buy? Whom to partner with? How to fund ongoing investment?
Our report provides insights to help businesses whether they are in the early stage of a digital
transformation or further down the track. Our findings demonstrate that the most effective way to
navigate this journey is to make investment decisions that support the future vision for the digitally
enabled business. A futureproofed digital capital strategy is at the heart of dealing in a digital world.
Tony Qui
Chief Global
Digital Officer
Transaction Advisory
Services
EY surveyed 600 non-tech corporate executives from around the world about their
digital strategies and have distilled their answers down to these key findings:
Digital defined
Buy or build?
76%
74%
90%
59%
87%
55%
59%
68%
67%
plan to use M&A to buy rather than build digital capability over the next
two to three years
85%
Digital transformation
function
Key questions:
The digital
future is here
But now, 74% of respondents in our survey say digital has had a substantial or
transformative effect on their business operations and processes, even more than on
their relationships with customers (66%) and vendors and suppliers (59%). Just as
pertinently, only 1% strongly believed that digital was having a minimal impact on
their industry.
1%
9%
Digital transformation was once all about the customer, from e-commerce to digital
marketing. Customer service strategies focused on online interaction, online
payments were introduced and marketing campaigns were tailored to a digitally
native generation.
16%
So, increasingly, companies are infusing digital innovation throughout the organization,
shifting their focus from front-office customer concerns to back-end business matters
and, indeed, the whole customer value chain.
39%
35%
Strongly agree
Modestly agree
Neutral
Modestly disagree
Strongly disagree
Technologies such as the Internet of Things, artificial intelligence and big data, coupled
with the ongoing growth in the creation and sharing of information, are changing the
traditional business ecosystem in three distinct ways.
Q: How would you characterize the extent to which digital transformation is impacting the
following components of your business?
How you conduct business operations and processes (e.g., manufacturing, back office, talent management)
3%
23%
52%
22%
Your customer relationships (e.g., enhanced customer experiences, frequency of touch, more products/services, new
transactional models, fulfillment ...)
5%
29%
46%
20%
Your relationship with vendors and suppliers (e.g., real-time ordering, just-in-time delivery, new transactional models,
virtual fulfillment ...)
7%
34%
Transformative impact
Substantial impact
42%
Moderate impact
Minimal impact
17%
No impact at all
76%
say increasing
competitive pressure is one of
the biggest impacts of digital
transformation on their industry
95%
76%
2. Empowered customers
Industry perspectives
Energy and
mining
Power and
utilities
Consumer
products
Financial
services
Competitive
pressures
Blurring
boundaries
Life
sciences
Automotive and
transportation
Blurring
boundaries
Blurring
boundaries
Competitive
pressures
Percentage that say they have clarity on the digital opportunities, risks and impact to the enterprise strategy
53%
55%
76%
78%
59%
71%
Dealing in a digital world |
Capital is at
the heart of an
effective digital
strategy
Key questions:
What is the payback period for your
digital and big data technology
investments?
How much of your digital strategy is
supported by C-suite and shareholders?
Do you understand where the gaps are
in your portfolio, and how do you fill
them?
Do you have access to sufficient
capital, or do you need to raise?
Industry perspectives
Energy and
mining
Power and
utilities
Consumer
products
Financial
services
Life
sciences
Automotive and
transportation
46%
55%
65%
54%
59%
61%
76%
87%
55%
have a sophisticated
method in place to quantify the
capital needed
digital strategy?
Rebalancing your portfolio of assets
46%
Reshaping the core business
23%
41%
59%
22%
Providing financing for internal R&D projects
9%
Yes
No
Capital is king
Digital is not a one-time investment, and appropriate funding is
paramount. Yet our findings reveal that most businesses still
rely too heavily on organic growth to build their digital
capabilities. This is more than likely due to constraints on
capital; indeed, nearly two-thirds of respondents (64%) stated
they would only be allocating up to 10% of their capital budget
on digital in the next two to three years.
This lack of capital is constraining growth. Many companies
are not thinking about the disruptive forces at play. Capital
management and digital strategy are often misaligned.
Companies need to embed a digital strategy in their Capital
Agenda (the strategic priorities assigned to the life cycle of
their capital). A robust digital Capital Agenda will help prioritize
investment and provide the sustained spending on digital
needed to drive long-term growth. To that end, companies need
to explore alternative capital-raising strategies, potentially
through IPOs, alliances or rebalancing their existing portfolios
via divestments.
13%
87%
Yes
No
56%
44%
There is clear accountability and leadership for all aspects of digital transformation in
our organization.
There is a lack of clarity around accountability and leadership for digital transformation,
with project responsibility fragmented across the organization.
Q: If there is clear accountability in your company, who is responsible for the primary aspects of digital transformation?
Strategy
Funding
Implementation
CFO
31%
Chief marketing officer
74%
Chief technology officer of similar
30%
Chief technology officer of similar
29%
Corporate development officer
8%
53%
Chief technology officer of similar
20%
CEO
4%
Corporate development officer
2%
42%
Corporate development officer
4%
Chief marketing officer
1%
CEO
2%
Inorganic
growth the
way forward?
Key questions:
What is the best way for you to build
innovative capabilities and culture?
Should you develop in-house
capabilities further or buy them?
Do you know where assets and
capabilities needed are located
and/or available?
Do you know how to find attractive
assets, partnerships and alliances?
How do you protect and realize value
once you have acquired the companies?
11%
16%
25%
47%
5market leading
4
3
2
1basic
Plan to employ
Currently employing
19%
18%
Analytics and cyber solutions
14%
19%
Future
Past
10%
38%
90%
62%
Yes
Inorganically (M&A)
No
Organically
Agile alliances
As companies look for new digital capabilities, alliances in
addition to and sometimes in place of acquisitions are also
proving attractive. A third (32%) of respondents plan to
create alliances and partnerships in the next two to
three years.
Unlike joint ventures, alliances are usually less involved and
not permanent, offering greater flexibility to businesses
pursuing a digital transformation strategy. Alliances allow
companies to plan for multiple futures. Companies can
commit underused assets, or assets that others are better
positioned to exploit, in exchange for more efficient digital
capabilities owned by collaboration partners. An effective
strategic alliance will allow each company to maintain its
autonomy while discovering new opportunities and more
effective processes, as well as access to new markets.
Companies are increasingly leveraging alliances with clients,
suppliers, vendors and institutions to create new business
models and ecosystems, increasing operational efficiency
and integrating the whole value chain to better serve
the market, while also increasing competitiveness. Swiftfooted companies are investing in promising start-ups via
incubations, collaborations and sponsorships and integrating
them to provide cutting-edge digital services.
50%
Outsourcing arrangement
14%
37%
Alliance or partnership
13%
32%
Joint venture
3% 8%
None
41%
24%
Industry perspectives
Build, buy or ally?
Consumer products
80%
77%
75%
89%
87%
31%
85%
43%
53%
Increase outsourcing (partnerships/alliances) of digital/
technology needs to third parties
38%
20%
29%
54%
57%
Financial services
52%
Automotive and
transportation
Life sciences
91%
70%
Increase outsourcing (partnerships/alliances) of digital/
technology needs to third parties
43%
Increase outsourcing (partnerships/alliances) of digital/
technology needs to third parties
20%
27%
53%
89%
49%
77%
31%
80%
79%
71%
78%
96%
M&A to buy rather than build digital capabilities
(inorganic)
55%
54%
Future Current
Key questions:
Dealing in digital
the challenges
From assessing value drivers to due diligence, there are challenges that need to be addressed when dealing
with M&A driven by digital transformation.
Respondents highlighted a number of particular challenges when buying in digital capabilities, including
integration (e.g., IP, systems, technology), talent management and retention, and the commercial
assessment of value drivers.
Moreover, the rise in acquisitions has not just come from technology companies buying within the sector, but
from strategic buyers of all types many of whom will not have the knowledge base to deal with challenges
that are specific to technology transactions.
Q: What were the most significant challenges that you encountered in your last digital transformation-driven
acquisition?
Commercial assessment of value drivers
27%
20%
21%
32%
31%
24%
25%
38%
31%
24%
Most significant
Significant
21%
Less significant
Least significant
24%
19%
1
Value and new due diligence
Valuing digital targets some of which will be pre-customer, pre-revenue and pre-profit
can be as much art as science. Good data is essential to build buyer confidence and
allows a better assessment of the value of capabilities acquired.
However, specialized digital-related due diligence (including technology, IP valuations,
cybersecurity, social media and data analytics) was the fourth most significant
challenge cited in our survey. When buying a start-up or a fast-growing tech business,
the due diligence demands can be very different. Due to the competitive nature of the
industry and the pace of change, these innovative companies are snapped up swiftly.
Bidders need to change their due diligence process to match the market.
The ability to quickly and efficiently analyze the vast amount of data at a corporates
disposal will have a dramatic effect on dealmaking. Acquirers need more sophisticated
and powerful processes for identifying, approaching and screening opportunities.
Working with the right advisor can play a pivotal role in understanding and realizing
value from a transaction, while also reducing risks.
Yes
No
2
Taking on talent
Similar risks and clashes can occur when it comes to a targets people and culture,
especially when acquiring start-ups. For acquirers, balancing the founder's need for
entrepreneurial autonomy with the incumbents established processes can be a major
challenge. Further, major corporations and start-ups have different attitudes to the
treatment of talent the very talent you are hoping to retain for your digital strategy.
Acquirers should identify key people early in the deal process and work to win their
engagement and build trust. If there is outstanding talent in the target company,
offering them larger roles in the organization can be motivational. Tie-in periods can
show the benefits of being part of a larger entity.
If designed well, retention agreements can buy time to engage talent, articulate what
they are going to do and really live it so that people are deeply ingrained in the
organization and want to stay beyond the agreed time. Companies need to ask
themselves how they can motivate and use the talent team as a catalyst to spark the
leadership team into action?
3
Integration issues
Post-deal integration, IP, systems and technology must be carefully addressed. More
than half (55%) of respondents highlight integration as a significant challenge. Yet,
only 37% of respondents to our survey have a different integration strategy for digital
transactions. In addition to technological legacy concerns and compatibility issues,
regulation and competition law could be an issue; when acquiring a cloud-based
business, for example, there may be risks associated with its use of technology
depending on the market, which can complicate a deal.
In order to protect investment, buyers need to have a different approach to integration.
This could be a tri-modal model: keeping the incumbent business ticking over,
incentivizing everyone on the innovation group, and buying a new business and keeping
it separate. Some companies may not be mature enough to integrate.
37%
63%
Yes
No
Raising
Identify funding options
Assist in fundraising (equity and debt) and address capital
markets requirements
Advise on how to optimize funding/financing structures
Identify assets and operations to divest
Advise on tax-efficient structures, including challenges
arising from new digital products
Investing
Advise on acquiring digital operations and services,
including financial and tax-related matters
Provide digital commerce due diligence and growth
strategy analyses
Evaluate the infrastructure and digital capabilities
underlying investment decisions
Perform transaction diligence, including digital analyses
aimed at revenues and costs
Advise regarding tax structuring, including consideration of
digital models
Preserving
Assist with digital improvement analyses enterprise-wide
or product
Perform valuations to model the impact of digital
align on company economics
Analyze customers and suppliers via social
media monitoring
Help preserve tax assets and reduce costs
Analyze customer journey (mobile, website,
call center, email, social)
Optimizing
Develop strategy and business models to improve a
companys digital positioning
Assist with digital scenario planning and assess impact to
shareholder value
Identify and evaluate assets
Support operational reorganization through modeling,
planning and implementation to improve a companys
digital value
Evidence from this study clearly shows that companies should no longer only pursue
organic R&D activities to meet their digital ambition. With limited capital and time,
companies should look to create a balance using M&A, JVs and alliances to ensure
their survival.
Dealing in a digital world | 19
Global
Steve Krouskos
EY Global Vice Chair
Transaction Advisory Services
@SteveKrouskos
[email protected]
+44 20 7980 0346
Julie Hood
EY Deputy Global Vice Chair
Transaction Advisory Services
[email protected]
+61 3 8650 7496
Tony Qui
EY Chief Global Digital Officer
Transaction Advisory Services
[email protected]
+44 20 7951 5820
Paul Macaluso
EY Innovation Leader
Transaction Advisory Services
[email protected]
+1 213 240 7040
Americas
Bill Casey
EY Americas Leader
Transaction Advisory Services
[email protected]
+1 305 415 1645
Asia-Pacific
Harsha Basnayake
EY Asia-Pacific Leader
Transaction Advisory Services
[email protected]
+65 6309 6741
Japan
Vince Smith
EY Japan Leader
Transaction Advisory Services
[email protected]
+ 81 3 4582 6400