Written by Dave McGrail, Head of Business Consultancy, Xalient
Mergers and acquisitions (M&A) activity was muted at beginning of 2023, remaining consistent with the environment in the second half of 2022. But towards the tail end of 2023 activity started to pick up and looking ahead to 2024 deal-making is likely to accelerate. Volatility and uncertainty may have put a brake on activity in the short term, but smart investors will always see opportunities as valuations become more attractive.
On top of transformational M&As, Morgan Stanley points out that lower valuations also make corporate separations more likely as companies with potentially lucrative business units in their portfolio decide to spin off or sell parts of the business to unlock shareholder value.
In an uncertain environment, there is a lot riding on the success of M&A activity, so how do you ensure that your merger, acquisition, or divestment delivers on its promise both pre, during and post the transaction?
The value and risk in the technology stack
Today in our digital-first and data-intensive business world; much of the value and risk in a merger, acquisition, or divestment resides in the technology stack. Understanding the architecture, security infrastructure, and legacy technology debt of each component business is essential for post-deal success. The dealmakers must determine what value the new company’s technology stack will bring, they need to understand what they are buying and the practical steps they need to take to extract that value.
However, creating a consistent application experience for users across the merged business can be a considerable challenge if the starting points for each entity are fundamentally different. Enabling connectivity can take several months to plan and execute. And with cybersecurity threats evolving daily, security risks grow as an increase in the attack surface is inevitable with every acquisition.
These technology challenges are compounded by the fact that in-house teams at each organisation are naturally invested in their status quo and can struggle to achieve an unbiased view of how to proceed. In these cases, employing external, neutral expertise allows an objective evaluation of the current position to determine the best route forward. Often, when working through an M&A, this also creates the opportunity to modernise the environment. This is where Xalient is typically brought in, as an extension to the M&A solution, often with the remit to modernise or deliver a digital transformation initiative.
Gaining the right support pre-acquisition
However, I would advocate that the time to bring in external technology advice and support is pre-transaction to help shorten the Transition Service Agreement (TSA) and ensure realisation of synergy savings. The importance of pre-discovery activities should not be underestimated, because if the TSA isn’t fundamentally right the buyer may pay an inflated price and fail to realise key milestones at the point of cutover. Our M&A advisory service enables us to conduct comprehensive pre-transaction assessments to identify potential risks while developing a robust zero-trust led plan for network separation or consolidation.
In my experience, rarely are M&As rightsized in terms of requirements; the M&A team often don’t discover everything that needs to be transferred in terms of assets. Getting this right upfront means the acquirer can realise value further down the line. Simplifying and optimising the TSA and ongoing run rate costs all help to improve the value of the transaction.
Operating business-as-usual throughout the transaction
Throughout the transaction process, it is important that the organisations can continue to operate their respective businesses securely and efficiently. That they are able to maintain a security posture and reduce risk with a mind towards modernisation. For the organisation to retain its talent, enable collaboration, and maintain its culture, employees must feel supported during any disruption. The cost of change must not be so high that it threatens productivity and loyalty – if it does, the move will fail. Here, a user-centric approach to the technology environment is critical.
For companies that are highly acquisitive, working with Xalient, we create a blueprint that enables them to realise the value of each acquisition or divestiture as quickly as possible. Shrinking timescales to a few months rather than many months or even years. In today’s fast moving business environment where change is the only constant, moving quickly is important otherwise the infrastructure that gets implemented might not serve future purpose.
Future proofing your environment
An M&A or divestment is a natural opportunity to transform existing networks and lay the foundations for a more flexible, resilient, and secure future state. For businesses expecting to scale post-deal, putting the right technology in place in a timely fashion is critical. Similarly, it is a good opportunity to explore how costs, security risks, and administrative burdens can be reduced by upgrading the technology stack and network architecture and removing technology debt along the way.
The right technology environment means the organisation can deploy early and enable users to access apps from Day 1. Zero Trust Network Access enables network segregation and segmentation without having to change the network, which means that the right users can access the right apps and the business can really accelerate.
Early investigation and due diligence pay dividends
Ultimately, early investigation and due diligence saves time, reduces risks and costs around the TSA. Investing upfront helps to right size the value of the acquisition. Well-thought-through technology strategies are critical to achieving positive outcomes from mergers, acquisitions, and divestments. Balancing business-as-usual commitments with large transformation projects requires smart use of resources, including drawing on external partners who can deliver the expertise and perspective required to devise and implement solutions.
If you are a serial acquirer, you simply can’t afford to get the transaction wrong repeatedly. A fast and well executed M&A or divestiture provides a playbook for the future, enabling the value of such transactions to multiply on each new deal.
With the right approach, businesses can seize the opportunity to ensure that the new entity benefits from the adaptive, resilient, and responsive technology that will position it for a successful future. Find out more about Xalient’s M&A Advisory Services.