Convergence in the Digital Age
The business mega-trend of the last 30 years, and likely the next 30 years, is the steady encroachment of technology and software into every human endeavor. The COVID-19 crisis has accelerated this trend, with in-person services abruptly eclipsed by digital competitors.
Indeed, the view of software as residing squarely in the technology industry is rapidly becoming antiquated. No surprise, then, that the rise of software is manifesting itself in the mergers and acquisitions market. Many call it “convergence.”
Convergence occurs when established, non-technological businesses innovate and compete by embracing software, internet and mobile connectivity, and the use of data to improve their operations, product offerings and how they interact with employees, suppliers and customers. The pace of technological change is such that few corporate leaders are attempting to build these capabilities internally— instead they are buying companies that already have them.
In years past, companies largely fueled growth by buying competitors; in other words, companies that looked a lot like they did. The bolder M&A moves involved what can rightly be termed convergence, but this usually meant acquiring companies specializing in an adjacent subsector within the same industry—a manufacturer of computers buying a manufacturer of printers, for example.
In Thailand, “digital convergence acquisitions or investments” are also picking up pace. Most transactions could be defined as relatively intuitive investments such as SCB 10x’s investment in SYNQA, a fintech solutions and product company or CP Group’s Series C funding of Ascend Money, it’s own subsidiary and the owner of TrueMoney.
However, bolder and more transformative transactions are also appearing, the acquisition of 42.25% in Intouch Holdings Plc., a holding company which focuses on telecommunications and the digital sector, by Gulf Energy Development Plc., a holding company whose core businesses are power generation, utilities & infrastructure, is the most poignant example to date.
Varun Budhiraja, a principal with Deloitte Consulting LLP, says that these acquisitions are not simply exercises in technology upgrade, but they attempt to change business models. “Many traditional product-based businesses are now looking at completely new ideas,” he says. “They are trying to find ways to add software, data, and connectivity to ultimately serve their customers’ needs, own the customer experience, and—therefore—expand the revenue stream.”
In most cases the acquired tech companies often have very different business models and cultures, giving rise to an unprecedented, exciting, and risk-fraught era in M&A. As with any atmosphere of excitement and change, those who chase this trend without a solid strategy may make big mistakes.
Most corporate leaders understand the need to innovate to meet disruptive threats head on. They also know that making acquisitions of smaller, software-focused businesses is an effective way to do it. Done right, it can unlock tremendous value. And yet, unsurprisingly, there are many ways to converge unsuccessfully.
Strategic and commercial mismatch: Business leaders should have a view of the precise value propositions justifying a tech acquisition whether it be to enhance efficiencies or how it adds value to customers. Another area of critical clarity is on how value will be created from the acquisition or the combination - what is needed to provide an environment where that value can be created?
Misunderstanding the technology: In acquiring companies in the fields of software, big data, the cloud, etc., some buyers are usually well outside their area of expertise. How to conduct a technology assessment and how to truly understand the assets are very important and a different challenge than many companies are used to.
Moving too fast: The classic private equity playbook for a “100-day plan” to jump-start post-acquisition transformation is not sufficient for a convergence deal. Integrating the operations of very different companies is going to be more complicated and take longer.
Underestimating culture clash: The integration of two company cultures, even within the same industry, can present challenges. Grafting a smaller, software-driven company onto a larger corporation can be much more difficult and, if done poorly, can drive precious human capital out the door. The risk of alienating the very people whose valuable skills and networks the organization just bought often means it’s a good idea to not seek cultural integration, at least at the outset of the merger. Think of it as incubation before integration.
IT security: Integrating software, connectivity, and/or data capabilities into a business comes with enormous new security issues, and corporate leaders who have not previously faced this new level of cyber risk should seek help in addressing it.
By Asadej Kongsiri, Partner and Financial Advisory at Deloitte Thailand
