The Corona crisis has undoubtedly provided a significant boost to digitization – confirmed by the results of a current KfW survey. And yet medium-sized companies are still lagging behind their actual digitization goals. There are a wide variety of solutions, including M&A. If a company cannot find a suitable organic solvent, it can be worthwhile to integrate digitization skills into your organization via mergers or acquisitions.
It is now generally recognized that the digitization of the business model is essential for sustainable competitiveness and must therefore be a fixed strategic component of almost all industries and company sizes. The digitization of medium-sized business models must neither be an end in itself nor be anchored exclusively in the area of responsibility of the IT department. Instead, it forms a strategic core issue that affects all company members equally – from employees to department heads to managing directors, executive boards, and supervisory boards. At the beginning of the digitization process, the various solution approaches are checked for suitability for the respective company. After the target image and digital roadmap have been developed and defined, the measures for the transformation towards a digital product and service provider are defined. Companies essentially have three options for transforming their processes on this complex and lengthy path: internal software development, operational cooperation, and acquisitions.
No Guarantee Of Success For Established Approaches
The first possibility, namely, to develop your software through in-house IT, is challenging to master, especially for medium-sized companies. As a rule, there is a lack of capacity and digital skills. Even if ERP software is already available, its further development can hardly be realized internally due to individualization. An even greater opponent here is the time factor: Even if an established company develops the right product with the appropriate in-house technology, many months to years will pass, which will generally negatively impact competitiveness. Pure “improvement projects” often take a year and a half and introducing ERP systems usually takes several years – at the cost of several million euros.
The second obvious option, operational cooperation with established companies and technology startups, is also no guarantee of success. Companies can build up know-how and use specialist knowledge in this way. Still, considerable cultural differences often have to be overcome in practice, particularly in project planning and implementation. Internal resistance, regulations, data protection, and restrictions on competition lead to formal difficulties and often to failure. The results of cooperation, therefore, give a rather heterogeneous picture and do not always meet the expectations and goals of the companies. If you look at the cooperation efforts with young companies, practice shows the possibilities.
High Effectiveness, Profitability, And Faster Expansion Of Market Leadership Through Acquisitions
On the other hand, a much more promising approach is to integrate digitization skills into your organization fully via mergers or acquisitions, possibly of young companies and startups. Medium-sized companies are currently somewhat reluctant to make equity investments. Although the number of investments in Europe is increasing again, private equity still forms the largest group of buyers and sellers. This can be illustrated using the example of the computer software industry: Compared to the same period last year, European transactions increased by 20 percent in the first three quarters, and the volume increased by as much as 34 percent. The largest buyer group here is private equity, accounting for more than half of the transactions and 60 percent of the volume.
The main reasons for the hesitation of medium-sized buyers are the perceived risk of a potentially harmful investment, the sometimes limited experience with such processes, and the current situation with the priority on stabilizing the business due to the macroeconomic turmoil in the markets. The concerns are understandable. However, companies must – or instead, because of this – continue developing innovative solutions for the problems, especially for the changing customer requirements. It is time to invest the excess liquidity from the last growth phase sensibly. Since new business areas can be generated through acquisitions and systems and processes can be meaningfully integrated at all levels,
The takeover of technology companies and the subsequent integration of the target company into one’s organization are usually highly effective. The possibilities for direct influence are far more significant for medium-sized companies here than within the framework of cooperation since the strategic orientation and, thus also, the decision-making processes are still the parent company’s responsibility. However, it is essential to ensure that the target company is not paralyzed and still has the opportunity to innovate. Both sides will only be able to take advantage of the takeover if the target company can act independently regarding strategy implementation and organizational design. This means that the design and the extent of the integration also matter. These can be designed as individually as the transaction itself.
The profitability aspect should not be neglected either. In the case of a clever reorganization of one’s product and service portfolio, the investment can prove to be highly profitable since, on the one hand, the company value increases significantly through a strategically suitable integration. On the other hand, an attractive return on investment can be achieved through a possible exit. M&A does not have to be purely strategic. Due to the effectiveness and the significantly reduced time-to-market compared to the greenfield approach, i.e., the organic development of digital know-how, an M&A process can stand out financially compared to your product or cooperation. The transaction costs are not necessarily higher than the costs for in-house development.
If the acquisition is ultimately successful, the medium-sized company is ahead of the competition thanks to the often unique know-how of the “new” company, possibly the startup, and can expand its market leadership much faster. And the target company also benefits from the takeover in several ways. Firstly, by creating a more significant market player, the economy is more advantageous for the company as a whole: cost synergies can be achieved that are relevant for both parts – old and new. Better framework agreements are negotiated, e.g., B. in purchasing, and can usually achieve recent sales on a larger scale with access to previously unattainable customer groups – mind you, can, but must not. It depends on the quality of the transaction implementation, the right target company, and a carefully prepared and structured integration, the so-called post-merger integration. This applies particularly to startups, as they can concentrate fully on the operational business and developing new business models and no longer have to raise fresh capital constantly.
To decisively advance your company’s digital transformation, it can be worth looking at a direct offer, especially in the tech startup environment, for a takeover. Suppose companies observe specific procedures as well as cultural and organizational differences. In that case, such an investment can positively affect both transaction partners and decisively advance digitization in medium-sized industrial companies. To increase the profitability of such transactions, it is helpful to take advantage of competent process support. Experienced M&A consultants have the right network and in-depth knowledge to find and successfully integrate the right target company.