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Business transformation fuels a digital mind-set but achieving it proves challenging

London--Businesses continue to transform through technology, but many are challenged to fully realize their digital vision, according to the EY Digital Deal Economy, a survey of more than 900 corporate executives across nine major industries in 26 countries.

Responding to the rapid pace of technological advancement, the vast majority of respondents (90%) are allocating capital to digital transformation. Successful transformations will be those that strike the right balance between building digital capabilities in-house and buying innovation and technology to create change faster than organic growth can ever achieve. However, less than half (48%) of corporates believe they have a coherent ‘buy–build’ approach.

Steve Krouskos, EY Global Vice Chair – Transaction Advisory Services, says:

“Buying intellectual property, innovation and talent to fuel digital transformation is a fundamental cornerstone of today’s M&A market. If companies are to create a better digital tomorrow for themselves and their various stakeholders they will likely need ‘buy’ as well as ‘build’ strategies to deliver the required results. Today, investors are prepared to reward companies that make catalytic technology and transformational acquisitions”.

Many are dealing in digital, but processes need updating

Almost three-quarters (74%) of companies are looking at inorganic routes to growth through acquisitions, alliances and joint ventures. In terms of achieving deal success, many show reservations about their current practices, with just under half (46%) claiming their due diligence processes are not ‘highly effective’ for digital acquisitions.

Tony Qui, EY Global Chief Digital Officer – Transaction Advisory Services, says:

“Digital M&A is still a relatively new phenomenon and the majority of companies are not adopting innovative deal processes – from cyber and technology diligence to IP review – required to ensure successful acquisitions. We also see challenges around valuations – you cannot apply the same methodology to a ‘clicks and order’ company as you would have done to a ‘bricks and mortar’ business”.

The survey found that just a fifth (22%) of companies are currently undertaking cyber diligence. At the same time, many organizations do not have all the key performance indicators (KPIs) in place to measure post-merger integration – just 34% have processes to evaluate people/culture success such as levels of organizational engagement.

Qui says: “Managing successful integrations has always been a challenge and companies have long risked losing value in the post-merger process. The coming-together of traditional and digital organizations, of sometimes completely different cultures, now makes that even more complex. Companies need to address these issues in their front-end deal strategy.”

Strategy and ecosystem vital to fast-track innovation

The survey finds a trend on the rise: digital ecosystems. These are a group of enterprises that interact with each other and share digital platforms to achieve commercial benefits or new innovation. Almost half (48%) of corporates are making significant investments in building their digital ecosystems, while a further 47% are making moderate investments – only 5% of those surveyed are not currently investing in this area.

The most important reasons for building ecosystems, according to those surveyed, are to develop new products or services (primary reason for 34% of respondents), enter new markets (24%), and plug gaps in digital capabilities (23%). Almost a fifth (17%) saw this as a way to defend against a competitive disrupter.

Qui says: “Establishing a digital ecosystem is critical to fast-tracking innovation, allocating resources and building structures and networks to realize the potential of the digital vision. The many advantages include a better way to identify promising start-ups via incubations as well as potential sponsorships and collaborations.“

Frequent capital and portfolio agility to underpin ambitions

Corporates are well-positioned to find digital transformation. The majority (82%) have sufficient balance sheet capital for digital M&A goals. Those that do not have access to explore alternative funding through bonds, equity or divestments – selling to raise capital to reinvest.

In terms of the expected benefits offered by capital investments in digital, many respondents perceive transformative potential to boost revenue (61% cite this as expectation); improve cost efficiency (57%), market share (56%) and share price (52%).

Digital maturity – time to follow the leaders?

Overall, the Digital Deal Economy finds three levels of digital maturity among respondents. ‘Aspirers’ constitute the majority (57%) and are challenged by many aspects of digital M&A. ‘Adopters’ (29%) understand where they need to update their approaches for unique digital challenges. And ‘Leaders’ (14%), an exclusive group, who have already undertaken a significant transformation and have fully aligned capital and digital strategies.

Krouskos says: “Leaders are ahead of the competition in many strategic, operational and commercial aspects of their digital M&A. That ‘Leaders’ from our survey are more likely to have the CEO driving digital transformation than the broader peer group demonstrates the level of importance those companies are placing on future-proofing themselves for the brave new world.“