Whisper it quietly, but the technology industry is riding something of a wave
at the moment. Talk of convergence is everywhere. Investors are scrambling to
identify and buy into the winners of the future, and mergers and acquisitions
are rising ever higher up the agenda in technology boardrooms.
So, have we been plunged back into the irrational exuberance of 2000? Have
the bubble economics of the dot.com boom reasserted themselves? Our recent
global study ‘Technology executive connections: Shaping digital convergence
through mergers and acquisitions’ and ongoing experience across the sector shows
that the answer is a resounding ‘no’.
The key to the difference this time around is that digital convergence is now
a reality ? as are the opportunities it presents. The technology boom in 2000
was built on promised results and optimistic revenue forecasts that, in many
cases, never materialised. What we are seeing now is companies actively pursuing
the opportunities created by the fact of digital convergence, driving a spate of
developments built on concrete products and commercially viable offerings.
Digital convergence brings together computer, phone, recording and broadcast
technologies within an all-digital environment that enables new, flexible uses
of products and services. By its nature, convergent development involves
bringing together various elements in a new way to meet customer needs. It is
also helping to drive an increased urge-to-merge, evidenced by rising
But, executives have learned from the last bubble and are approaching the
current round of M&As in a far more circumspect way. In a further shift away
from the 2000 mindset, companies are now acting on the basis of hard,
established and carefully thought-out strategies, and bringing to market
services, products and solutions that consumers actually want.
As this process gathers pace, the successful players are those that are
moving quickly – but in a careful and highly premeditated way to establish the
right footholds in the emerging digital landscape.
CEOs’ caution is based both on past experience and realism about the future.
Our survey shows that over 40% of participants expect to see some form of major
corporate failure over the next few years, perhaps stemming from companies
reaching too far beyond their strongest skills.
This awareness is serving to focus the minds of the board on the factors that
are fundamentally important to the success of the M&A transaction, including
elements such as due diligence and the strategic assessment of what each partner
is bringing to the deal.
M&As are by no means the only option for convergent deals, however. To be
a player in today’s integrated technology landscape, companies need to move
quickly to take advantage of other organisations’ core competencies. M&A –
which CEOs regard as a means of capturing entire market positions – can
sometimes be a blunt, unwieldy and overly risky way of doing this.
As a result, partnerships and alliances are seen as an increasingly viable
alternative to ‘pure’ M&A, with over half of our survey participants
believing they actually present a quicker route to accelerate convergent
revenues. The question for boards considering a partnership or alliance is what
each party is contributing to the collaboration as a whole. To create value on a
sustainable basis it has to work for everyone.
But while CEOs feel that partnerships often offer less permanent financial
risk to a corporation, they add that alliances may sometimes move too slowly to
capitalise on a fast-moving opportunity.
All this underlines the fact that success in this second technology boom will
depend on finding, making and sustaining the right strategic partnerships that
fulfil real consumer needs. Technology CEOs are undoubtedly excited about the
possibilities of digital convergence.
But this time around they are paying closer and more careful attention to the
long-term financial viability of their companies, while looking to deliver
enhanced products, gain new customers and increase market share, all without
taking on unnecessary risk or financial exposure.
On the M&A front, our research shows that the most likely targets for
consolidation are software companies and business information content
developers. The key questions for a potential acquirer will revolve around
making the right strategic assessment of the risks and opportunities, and doing
their homework to cover those areas and create a clear, realistic integration
plan from the outset.
Whether the chosen approach is M&A, alliance or partnership, the
successful players in digitally converged media will be those that manage to
balance vision with caution in gaining access to the competencies they need.
MERGE OR COLLABORATE? FOUR POINTERS FOR TECHNOLOGY ALLIANCES
In a global survey of 149 technology executives, followed by 30 in-depth
interviews, the findings highlight four key factors that technology companies
should bear in mind in a converging digital world. These are:
1. Acquisitions: digital M&A will continue to surge
Almost two-thirds of technology executives expect the consolidation trend to
continue over the next three years, driven mainly by digital convergence.
Overall, the mood is almost exuberant, but executives are intending to proceed
2. Partnerships and alliances: increasingly favoured as alternatives
Though they see the value of M&A, executives recognise partnerships and
alliances as a worthwhile alternative means of profiting from convergence with
less risk and disruption. Over half of respondents believe alliances are
actually superior to M&A as a way of collaborating to produce digital
3. Rationale: the deals that work start with strategy, not short term
Success in this second technology boom depends on finding and forming
strategic partnerships – whether through full M&A, partnerships or strategic
alliances – that fulfil real and emerging consumer needs. The days of basing
deals on vapourware and optimistic cash flow projections are long gone.
4. Execution: successful digital M&A requires a great business
strategy and a clear integration plan.
For large and small acquisitions, the art is in the detail. Integration should
be rapid and thorough, addressing issues including accelerating cost synergies,
standardisation of accounting and financial systems and optimisation of product
development, R&D and customer relationships. Cultural integration is
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