In 2015, consolidations of businesses through mergers and acquisitions hit a record, dizzying height of $3.6 trillion, as reported in the Financial Times.
The volume of global M&A activity in 2016 fell 18% from the record high seen in 2015 — from $4.66 trillion in 2015 to $3.84 trillion in 2016 — according to a review published Dealogic (as reported in Financier Worldwide, marking an end to three consecutive year-on-year increases.
Despite Brexit concerns and European instability, the uncertainty of a new U.S. president, tightening fiscal and immigration policies, and increasing governmental regulation, many experts are predicting strong M&A activity in 2017.
According to a recent KPMG survey of M&A experts, deal activity is expected to remain healthy in 2017:
- 84% expect to initiate a deal in 2017, and almost 75% of those surveyed plan on doing multiple deals.
- 84% expect middle market deals to dominate in 2017; 78% say their deals would be worth less than $500 million.
According to EY’s Global Capital Confidence Barometer survey, most companies remain bullish on M&A in 2017:
- 57% expect to actively pursue acquisitions in the next 12 months.
- 49% of companies have more than 5 deals in their pipeline.
- 91% expect the deal markets to grow or hold steady over the next 12 months.
M&A risks and the vital role of IT
While M&A activities provide a platform for growth, these complex deals come with sizable risk.
According to collated research and a recent Harvard Business Review report, the failure rate for M&A sits between 70% and 90%, as reported in BusinesReviewEurope.
An analysis of 2,500 such deals by global management consultant firm L.E.K. shows that more than 60% destroyed shareholder value, as reported in Harvard Business Review.
American Online (AOL) purchasing Time Warner for $164 billion is perhaps the greatest M&A fail in recent history, with AOL Time Warner reporting an almost $100 billion loss after just one year from the historic merger.
The success or failure of an acquisition lies in the nuts and bolts of integration. And who is expected to orchestrate this integration and unleash the full value of a merger or acquisition? Why, it’s IT, of course!
Recent research from McKinsey & Company puts the importance of IT in realizing M&A value into perspective. McKinsey found that across multiple industries, it is common that more than half of the total cost synergies are related to IT, either directly, or through role of IT as a key enabler of capturing other synergies through business process integration.
Digital transformation and the M&A imperative
The need to respond to challenges while navigating a complex and fast-changing environment makes deal-making an imperative, not just for growth but also for survival.
84% of business leaders surveyed by KPMG identified technological disruption is an important deal motivator, with companies involved in M&A being most interested in acquiring relevant technologies and responding to transformation in their industries, as well as a desire to expand their products.
The external and internal impact of digital transformation on M&A activity in the years ahead cannot be understated.
Internally, companies are investing massive amounts of money on digital technologies that close the gaps with their customers and partners, drive enterprise-wide efficiencies, and make them faster and more flexible than the competition. Migrating to a digital core and digital applications also greatly enhances a company’s ability to execute on the M&A front — improving and streamlining the post-merger integration process by orders of magnitude.
Externally, companies are acquiring digital capabilities via M&A. In many cases, snatching up the digital-savvy newcomers threatening their leadership status. It is also the case that, amidst a decade long slow growth economy, M&A, done right, can provide a strategic platform for future growth and stave off death-by-disruption. According to EY, 37% of technology executives say digital disruption is driving their acquisition strategy.
According to the EY Global technology M&A report — 3Q16 final look, Tech and non-tech companies being disrupted by innovative digital technologies turned to M&A in numbers that made Q3 2016 another blockbuster quarter for global technology M&A value.
As summed up by Jeff Liu, EY Global Technology Industry Leader, “Incumbent tech companies seek deals to accelerate mobile- and cloud-driven transformations; non-tech companies seek strategic technologies; and private equity (PE) firms seek opportunity in hidden gems overlooked by many investors.”
With US$155.5 billion in disclosed value, 3Q16 ranked as the third-highest aggregate value quarter on record, marking an increase of 22% from 2Q16 and 138% year-over-year (YOY). At US$349.4 billion, year-to-date (YTD) aggregate value is 30% higher than YTD 2015’s all-time record pace.
SAP (Cloud ERP) to the rescue
As the backbone for most companies, ERP has become indispensable -- integrating all data and processes of an organization into a unified system, driving key business processes, providing enterprise-wide reporting capabilities, and supporting decision-making at all levels. For several Fortune 500 Companies, ERP is the base foundation wherein IT acts as an enabler for business growth and profitability.
Available in the cloud and on premise, SAP S/4HANA is a real-time ERP suite designed to provide the digital core business needs to re-imagine business processes and drive transformation strategies, which today, increasingly include mergers, acquisitions, and carve outs as businesses strive to sustain growth, stave off disruption, and stay ahead of the competition.
Driven by a desire to better contain the costs and complexity of ERP, as well as the need to improve flexibility and responsiveness, a growing number of businesses are looking to the cloud. General consensus among industry pundits is that cloud ERP will be the norm within 5 to 10 years.
Key benefits of migrating ERP to the cloud include:
- Fast implementation time
- Quick access to functionality
- Capex vs. Opex savings — reduces capital investments without increasing liabilities and improves cash position for higher shareholder evaluation
- Flexibility due to subscription rather than licensing contracts
- Cost-efficient scalability by way of “pay-what-you-use” concepts
As a direct extension of these key benefits, cloud ERP enables acquirers to capture and lock-in synergies at a depth and speed previously unseen in historic merger integration programs, accelerating deal opportunity and value.
On the flip side, for companies positioning themselves for acquisition, having Cloud ERP is an added asset when it is being evaluated as a potential target.
With SAP S/4 HANA, cloud edition, SAP significantly expands the business scope of its cloud offering built on SAP HANA, giving customers the opportunity to easily deploy hybrid scenarios — combining on-premise and cloud solutions — for unprecedented IT flexibility and accelerated business innovation.
The hybrid cloud model is emerging as the de facto standard for enterprises today because it is uniquely suited to help businesses redesign their IT strategies in a strategically sound way that solves the cloud-migration riddle while protecting and extending existing IT investments. Equally vital, the hybrid cloud model enables businesses to execute M&A activity with far less risk and at an unprecedented scope and pace.
Business leaders increasingly are embracing flexible, two-tier, cloud-based systems that enable enterprises to keep their SAP infrastructure while utilizing SAP cloud-based ERP solutions for subsidiaries and international units — a popular strategy among large enterprises that have invested heavily in customizing their on-premise ERP system.
Two-tier systems also enable enterprises to extend ERP and other critical capabilities to newly acquired or divested assets during mergers, acquisitions, and divestitures — cutting deal-related costs, increasing efficiencies, and creating a strong technological foundation to support future M&A events.
Contact NTT DATA today to learn more about how our SAP cloud and managed services offerings can advance your digital transformation initiatives and step up your M&A game.
Post Date: 2/17/2017