Don’t Squash the Butterfly: Three Steps to Technology Acquisition Success

Jim Ryan, Managing Director Transaction Services Practice Leader
Gordon Tucker, Managing Director Global Technology Industry Practice Leader

Technology companies are in-demand acquisition targets, and not only within the technology sector. Between 2013 and 2016, private technology investments by non-tech Fortune 500 corporations grew 149 percent and were on pace to exceed investments by Fortune 500 technology firms for the first time in 2017, according to a recent report from CB Insights.

Faced with the choice of building; partnering; or buying the tools, resources and talent required to compete in the face of accelerating digital disruption, many older established companies are choosing to buy. Not surprisingly, technology industry respondents in a recent survey from Protiviti and North Carolina State University’s ERM Initiative identified the rapid speed of disruptive innovation and new technologies outpacing an organization’s ability to compete and manage that risk appropriately as the top risk issue.

Done right, technology acquisitions can provide established organizations with a transformative opportunity to reinvent themselves and achieve synergetic returns far in excess of what analysts might forecast based on simple quantitative measures. To get it right, however, acquiring companies need to take steps to preserve the unique success characteristics that made an acquisition target attractive in the first place, so that they are not eliminated in the transition. In other words, they need to be sure not to “squash the butterfly.”

The history of mergers and acquisitions (M&A) is not good in this regard, as explained by Harvard professor Clayton Christensen in the Harvard Business Review.

“Failing to understand where the value resides in what’s been bought, and therefore integrating incorrectly, has caused some of the biggest disasters in acquisitions history,” wrote Christensen, who is widely regarded as one of the world’s leading authorities on disruptive innovation.

The ability to effectively preserve and enhance the value of an acquired company during and after integration is critical to M&A success, and will depend on how much effort is expended throughout the deal life cycle to identify and preserve the unique value that created the target’s success. This effort is one of many success factors in the technology acquisition deal life cycle and should be taken at the outset of Component 5: Transition Readiness (see graphic). For the purpose of this discussion, we want to highlight three phases shown in our comprehensive, five-phase Protiviti deal life cycle.

Decisioning Phase – Step 1: Identify Value. The first value assessment of a potential target should occur prior to any offer or pricing decision. This involves evaluating the target’s value in terms of the acquirer’s ability to preserve that value when integrated. Understanding the integration expectations necessary to preserve that value informs the value preservation metrics and risk profile to be managed throughout the rest of the deal life cycle. Understanding value at this early stage is critical because it will form the basis for post-merger assessments of value preservation.

Operationalizing Phase – Step 2: Define Value. Once key value drivers have been identified, it is important to communicate with stakeholders on both sides of the deal as to what those drivers are and the steps that will be taken to preserve them during and after the merger. This activity occurs during Component 8: Transition Planning and is executive-sponsored, becoming a daily-monitored focus point during the transitioning phase.

Stabilizing Phase – Step 3: Assess Value. The acquiring company needs to follow through after the acquisition with assessments to make sure that all of the transitioning activities have been completed and that none of the key value drivers have been destroyed. There is a tendency in M&A transactions for leadership to become focused on financial details to the detriment of strategic goals, which hinders integration improvement on the next deal.

One important concept, or key principle, in our MAD Playbook is the need, throughout the integration process, to keep making intangibles tangible. Culture is such an intangible; to identify what the tangible elements of culture are and how to carry them over into the merged entity is often difficult but not impossible.

As the pace of M&A activity accelerates, it is increasingly important for organizations to not do the wrong things faster! Rather, both sides of the M&A equation need to understand where true and lasting value is created and how to enhance it in the integrated organization for long-term success. Companies that look beyond the finances and pay careful attention to preserving a culture of innovation are clearly the smart ones when it comes to technology acquisitions. Innovation is the ticket for success in the current competitive and disruptive environment. Those who manage to get hold of the right target and nurture its full transformational potential by executing a thoughtful post-acquisition integration strategy will be the clear winners in the race.

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