UK firms look to change M&A set up to better integrate digital purchases

28 February 2018

A common culture is often cited by merging businesses as a key factor in successfully realising a deal. However, according to a new report, a failure to integrate culture is preventing UK companies from reaping the rewards of digital acquisitions, a new study has found, with only a quarter of firms working to infuse the DNA of their recent purchases with their legacy business.

2017 bore witness to 12 months of bullish merger and acquisition activity across Europe. Deal value continued to rise, in spite of a drop in deal volume across the continent, but activity was particularly frenetic in the UK. In Q3 alone, Britain played host to 163 successful domestic and cross-border acquisitions and disposals worth £86.4 billion, following a bumper Q2 which saw 241 transactions valued at £33.2 billion, according to Office for National Statistics figures. In part, this was thanks to multiple drops in the value of the Pound, prompted by struggling negotiations over Brexit, which made UK-based targets significantly more attractive to overseas investors. This was exemplified by, among other areas, record levels of Chinese investment in the London real estate sector.

A large portion of M&A deals in the UK were also spurred by the growing global trend for digital transformation, with a plethora of transactions involving British digital firms – the blend of decreased prices and a growing need for digitalisation making such entities attractive assets for firms both at home and abroad. Global consulting firm Accenture were one of many players involved in the snapping up of digital prospects in the UK, as part of the firm’s $1.8 billion global acquisition drive. This included deals for digital product development firm Intrepid, and at the turn of the year, Mackevision, a digital design agency best known for their visualisation work on hit television series ‘Game of Thrones’.

Merger & Acquisitions Worldwide, 1985 - 2017

According to a new report from the multifaceted consulting firm, the digital M&A deal trend is likely to continue over the next year as UK businesses increasingly look to buy-in the latest digital technologies and talent. While ‘buy over build’ strategies can help companies accelerate change and drive competitive advantage, however, Accenture found that many UK businesses are struggling to extract the full value of acquisitions due to their inability to integrate diverse company cultures.

The belief that a close cultural fit is essential to a successful acquisition is commonplace among M&A activity. This could be seen when OC&C and EY held merger talks back in 2014 – prior to EY’s purchase of The Parthenon Group – as one of the major advantages to the proposed integration was reportedly the close cultural similarities between the two. Similarly, the breakdown of a potential A.T. Kearney and Booz & Company merger, along with the failure of a potential Roland Berger and Deloitte Consulting deal, were both put down to cultural differences.

Despite the received wisdom that a post-acquisition merger may flounder without this fit, however, the Tech-Led M&A study from Accenture Strategy has revealed that the majority of companies making digital acquisitions to gain cutting-edge technology and new talent are struggling to extract the full value of deals, due to their inability to integrate diverse cultures. The study surveyed 1,100 C-level executives globally, including 110 from the UK.

What typically triggers an M&A event for your company

Overall, 43% of acquisitions were aimed at acquiring new digital capabilities, while 36% were directly targeted at filling a digital skills gap. In the UK, this varied slightly 48% of purchases looked to gain next-generation technology, and 39% aimed at addressing a skill gap. In line with this, at present, 73% of UK companies were found by the study to keep their recent digital acquisitions as standalone businesses – particularly those operating in consumer goods and energy industries. This comes despite 71% of companies recognising that technology integration is critical to acquisition success, alongside cultural integration at 62%.

One consumer packaged goods senior executive told Accenture, during a 2017 roundtable event, that their firm was seeking to learn from their acquisition, without formally integrating them, stating, “Our new acquisition is a rock star. Growth through the roof. An agile culture without a lot of cumbersome policies and procedures. It obviously has worked well for them but is nothing like our culture. Part of the deal made was that we would keep our ‘large established company’ hands off their culture.”

Changing ‘digital deals’

Commenting on the findings, Markus Rimner, Mergers & Acquisitions Europe Lead for Accenture Strategy, said, “Our research indicates a positive trend towards businesses bringing in digital technologies and skillsets through acquisitions. Despite Brexit, these smaller deals have been relatively shielded from the wider impact of uncertainty. This ‘buy over build’ strategy comes in response to large companies wanting to fight back against new disruptors and accelerate their competitive advantage. But many are struggling to integrate diverse cultures – the ‘secret sauce’ powering digital acquisitions – which is key to companies accelerating change.”

A traditional M&A approach doesn’t work for digital

This looks set to change in the future, however, with executives keen to get the best possible value from their purchases, and gear acquisitions more toward a formal integration. Three quarters of the UK business leaders polled either agreed or strongly agreed that their companies cannot rely on their current M&A capabilities for digital deals.

62% plan to use a different pre-deal team and evaluation criteria going forward, while 64% will follow a different valuation and cost model in future deals. On top of this, 88% of British business leaders subsequently believe Chief Information Officers – the most senior executives in enterprises, responsible for the information technology and computer systems that support company goals – need to have a say much earlier on in M&A discussions, in order to see a closer cultural tie between the broader company and their new assets.