Delivering innovation to big business through disruptive M&A

Globally, companies are acquiring disruptive technology and tech firms, says Deloitte's Mohsin Khan (pictured).

As part of their Breakingviews predictions for 2019, Reuters wrote (in late 2018) that “disruption will be the mother of M&A in 2019”. This reflects the growing trend of ‘acquiring innovation’, as a growth driver and a protective measure made by established corporates who are determined not to sit around and wait to be disrupted by the ‘upstart’ they didn’t see coming.

The concept of business disruption is well established these days. Uber and Airbnb are two of the classic examples: start-ups with new technology who entered markets (taxi/transportation and hospitality/accommodation respectively) and turned them on their heads. Not only is the technology platform revolutionary, but the operating model – connecting service providers to customers, rather than directly offering your owned assets – is too. Suddenly market leaders who were established, and frankly comfortable, were scrambling to react to the changes and compete with newcomers.
 
This disruptive effect was so significant it led to the coining of the term “uberisation” to describe an operating model built on networked service provision. When a disruption of this magnitude strikes, it soon builds up a kind of mythology around it in media and the public agenda. You no longer need to be an MBA candidate to be familiar with disruption, or (for example) the cautionary tales of Kodak (the film photography company that famously bet against digital cameras and tumbled off its pedestal to declare bankruptcy in 2012) and Microsoft’s Steve Ballmer misfire on the iPhone (Ballmer declared in 2007 that there was “no chance that the iPhone is going to get any significant market share”).
 
One of the common motifs of this disruption story is the outward-in structure of threats – how outsiders see an industry through new lenses and this allows them to see disruptive opportunities. But is that the only way? Can large corporates nurture fresh “lenses” and introduce innovation to prevent going the way of the business-dinosaurs?
 
The acquisition model

One way is through “disruptive M&A”, a growing trend globally – and one starting to gain ground in South Africa too. A recent example is US tobacco firm Altria buying a 35 percent stake in vape manufacturer Juul and a 45 percent stake of marijuana company Cronos.  And locally, in May 2019, Vodacom announced their acquisition of a 51 percent stake in South African internet of things (IoT) start-up, IoT.nxt.

“Globally, there is increased focus on disruptive M&A as a strategy. Non-technology companies have overtaken technology companies as the largest acquirer of tech firms worldwide and Deloitte’s latest Global M&A Index shows that from 2015 to 2018, companies spent $877 billion acquiring disruptive technologies and business models, up 28 percent from the prior year. In another recent survey, 77 percent of businesses reported that they expect to compete in a new sector within the next three years,” says Mohsin Khan, a partner in Deloitte’s Financial Advisory practice. Mohsin is also the digital lead for Deloitte Financial Advisory in Africa, under which disruptive M&A falls.

“There are companies that are challenged for growth in their traditional business models, and where there is an imperative on them to create the ‘business of tomorrow’, they don’t necessarily have the capacity or the ability to generate innovation in-house,” Mohsin says. For these companies, a deal that allows them to bring in new tech, new people, or new approaches is a (relatively) quick and proactive protection against outside disruption, he explains. “A disruptive M&A deal can take the form of an acquisition, a joint venture, a partnership, or corporate venturing; all of those would fall under the spectrum of disruptive M&A.”

Kickstart your digital transformation

Karin Hodson, the Africa managing partner for Financial Advisory, says disruptive M&A is a key initiative of theirs as they are increasingly seeing non-tech corporates buying out tech start-ups or buying into adjacent industries.

“This is driven by the need to change from their normal business models, and for some companies it would even be a case of ‘adapt of die’. Business models are rapidly changing, and firms are asking themselves how they shift accordingly, upscale quickly, or gain access to new technologies.”

She continues: “This is something that we are looking to assist clients with. We see our clients who are looking into ‘adjacencies’ and helping them connect with start-ups. Locally we have already seen some of these types of deals happen, particularly within telecommunications and financial services.”
 
Their network and deep digital knowledge, says Karin, allows them to add value at every stage of a disruptive M&A deal, even from the first step of sourcing the right target company or technology. Deloitte has an existing network of start-up and innovation hubs globally that they tap into, and in South Africa they enjoy a relationship with Grindstone, an accelerator programme. And because of the connected nature of business today, local companies can take advantage of new tech developed in Israel, or a Netherlands-based firm could enter into a deal with a South African start-up.
 
Deep digital know-how

But it is not, Karin and Mohsin caution, as simple as swallowing up a small competitor or technology.

“Everyone does M&A. There are numerous transactions occurring in the market, but disruptive M&A is quite different,” says Mohsin. These deals are inherently complex and the skills required often fall outside of the scope of the traditional M&A field of expertise. “How you value these companies will be very different from valuing an established, mature business, compared to technology start-ups or scale-ups with unproven track records but potentially high-value intellectual property.

“These deals happen at a much faster rate than a typical M&A deal. This is not M&A as usual, and may involve multiple successive or simultaneous transactions” he says

Karin concurs, adding that the valuations and due diligence required here involve understanding matters like IP ownership, third-party contracts and dependencies, as well as platform and technology nous. “And likewise human resources, culture, and fit of individuals needs to be considered, all the way through to post-merger integration.”

Culture is king

The latter is often overlooked, says Jared Moodley, an associate director in Deloitte’s Financial Advisory practice. “The last thing you want to do is acquire a start-up, incorporate them into your large corporate structure, and kill the innovation.”

“That is part of what we do – understanding the culture fit, and advising on post-merger integration. It must be driven by an understanding of strategy, working with the leadership team to articulate what they want from a deal.”

“Then it’s about doing the right deal – be it an acquisition, a joint venture, a partnership or corporate venturing – with the right start-up company, within the right ecosystem.”

For more information on disruptive M&A, visit www2.deloitte.com/za/DeloitteDisrupt. 

This article was origincally published in the Q3 edition of CFO Magazine, available in airport lounges now.