Creating value through deals has become harder for private equity (PE) firms and their portfolio companies (portcos). Without access to the cheap capital and favourable refinancing conditions of the past, PE firms have had to intensify their focus on growth and efficiency, while exploring innovative ways to enhance value and drive returns across their portcos.
A critical enabler, often underestimated or mismanaged, is technology. An effective technology strategy and clear understanding of the technology levers for PE firms and portcos can determine M&A success or failure, topline growth, and increase the valuation multiple.
In this article series, we explore how technology can create value for PE firms and portcos, starting with how technology can assist in investment decisions and execution.
In the current economic landscape, one of the key levers for PE firms to create sustainable value and improve returns within a portco is through Mergers and Acquisitions (M&A) – specifically, bolt-on acquisitions, also known as "tuck-ins". In our joint IPEM 2024 Pan-European Private Equity Survey, 47% of the PE operating partners surveyed identified "M&A (bolt-on acquisitions)" as one of the top priorities for generating value within the portfolio company.
When focusing on M&A, our clients commonly approach us with these questions:
- "How can we identify and integrate a series of bolt-on acquisitions to support value creation?"
- "How can we understand whether the technology infrastructure of a potential target supports our investment thesis?"
- "For a forthcoming acquisition, how can we ensure business continuity from day one?"
Our experience tells us that the answers depend on our clients' ability to execute effectively in five areas:
1. Build technology considerations into target screening, valuations, and due diligence
We recommend factoring technology considerations into the target screening and valuation process, such as the value proposition of technology, scalability of systems, and risk profile of the technology estate. Scan the technology landscape for potential risks and opportunities, evaluate the flexibility and scalability of the target's technology and operating model to enable future growth, and define the investment required to drive value creation.
Tools such as Artificial Intelligence (AI) can support here. In the M&A pre-deal environment, approximately a fifth of PE leaders say they are already using AI to change the way they conduct deal sourcing and due diligence, according to our Ninth Annual PE Leadership Survey. We expect this proportion to rapidly increase.
2. Ensure IT and operations are closely involved in M&A due diligence
While both buy-side and sell-side parties may share complementary business strategies, integrating their respective technology and operations can prove difficult. It is therefore important to have an integrated Ops-and-IT view of any red flags and opportunities, to move quickly to create value in costs and commercial activities. This includes identifying any one-off remediation costs for any potential red flags, and factoring in the impact of additional ongoing recurring costs on EBITDA into the negotiations to protect the investment thesis, as well as to maximise value potential.
3. Avoid value erosion due to overlooked technology and cybersecurity risks
Technology risk mitigation is key to avoiding value erosion throughout the M&A process. Target acquisitions can carry different technology or cybersecurity-related risks, and we find that M&A deals typically see elevated risk of cyberattacks to both parties from day one.
Evaluating cybersecurity across a variety of enterprise value dimensions is complex, but vital. This includes incident response, business disruption, reputation, competitive advantage, litigation and regulatory actions, asset replacement, and customer and third parties. We recommend putting robust remediation plans in place to mitigate technology risks to business continuity, and that ensure enhanced cybersecurity and monitoring throughout the acquisition period. This gives greater confidence to the buy-side team and will make integration smoother. The goal is not just an incident-free day one, but to prevent incidents, reputational damage, and value erosion throughout the acquisition period.
4. Define a clear technology integration strategy
To ensure a smooth integration of bolt-ons, ensure executives are aligned on the framework and guardrails for making key technology-related decisions. It is critical to have clarity on: the integration approach (e.g., full integration, best-of-both, or keep separate), as this will drive systems-related decisions; the integration synergies that are enabled by technology, to avoid making sub-optimal technology choices; the pace at which integration will be driven; and the cost to achieve the target end-state.
Start with identifying areas of technology overlaps across systems, teams and contracts, while maintaining focus on the things that matter most: ensure that retained platforms are aligned to the needs of the external and internal customers; capture and protect technology synergies expected from the acquisition; identify and secure key personnel; stop projects that are no longer aligned to the strategic direction, to redirect resources to support integration; and consolidate, renegotiate, or discontinue contracts as appropriate.
5. Prepare for day-one readiness
In our experience, the preparation and planning of the transition phase and day-one readiness should extend its focus beyond the initial acquisition phase, and consider the longer-term strategic roadmap. This involves developing the foundations of a longer-term vision and blueprint for the future state of combined technology, considering how the integrated entity could look from the perspective of application platforms, and envisioning what the transformation journey would look like.
As day one approaches, ensure sufficient governance between the sell- and buy-sides has been established. This should include established reporting, processes and ways of working across a joint team, to facilitate communication throughout the transition phase and ensure an incident free day one.
Where next?
Technology is a powerful lever for PE firms to create and sustain value, and even more so with current market conditions. By taking a structured, rigorous approach to building technology into M&A strategies and processes, firms can capture synergies and drive efficiencies.
In the next article in this series, our experts will focus on how technology can help drive topline growth for generating value within portcos.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.