A Message From Our Chair:
Once again we are very pleased to provide you with another issue of the Manatt Digital newsletter. In this edition we revisit the topic of mergers and acquisitions, an important area of focus for the firm's legal practice and for our business consulting and strategy team at Manatt Digital. This month is particularly unique and exciting as we are using October to showcase our "Shaping the Future: Trends in Digital Media and Frontier Technologies M&A" report.
For the past five months our team has been working in conjunction with the financial intelligence firm Mergermarket to conduct a study of senior global executives to better understand their views and strategies for M&A activity within the digital media and frontier technology space. The study examines a number of critical factors across the dealmaking cycle and includes many interesting findings on geographic and cultural preferences, the use of third-party advisors during diligence, and the often overlooked challenges that are posed by integration after a deal is complete.
We hope you find this report insightful and a useful tool for navigating the increasingly complex world of M&A in the digital sector!
Hale Boggs
Chair, Manatt Digital
Shaping the Future: Trends in Digital Media and Frontier Technology
With an increase in demand for digital content, as well as an influx of new advancements to meet these needs, media and technology companies are using M&A as a strategic tool to rapidly grow. Most acquirers are using this tool to enter new market segments, as they realize three options lay in front of them: expand into a new area, be acquired by a larger company, or get left behind in the high-tech modern world.
In the report, senior global executives share their strategies and views regarding M&A in the digital media and technology sectors. The study shows that executives use M&A to penetrate new markets, emerging technologies are gaining positive traction in the market, integration is the most vital and challenging part of M&A, and executives consider Scandinavian countries as the leading target for buyers among global opportunities.
Key findings include:
- Emerging technologies, including the Internet of Things, live streaming, wearable tech, artificial intelligence, AR/VR, eSports, and drones, are among the most attractive market segments for acquirers.
- Almost one in two participants see incorrectly evaluating a technology's importance or potential as the biggest risk in an M&A deal involving the digital media and frontier technology sectors. This is an important finding as the study also found that due diligence for M&A in these sectors is more difficult and complex than it is for other industries.
- The most vital and challenging aspect in conducting due diligence in a potential digital media or frontier technology acquisition is valuing a target's real assets, including data, technology and hard assets.
- Integration is also a vital and challenging aspect of M&A. More than half of respondents found integrating work cultures to be the most significant challenge in the process. Yet only 9% identified planning for potential integration issues in the due diligence phase as a vital activity. This misalignment of priorities highlights the difficulty in optimizing investments and ensuring a successful transaction.
- The findings also showed that Scandinavian countries represent the top cross-border priority for almost one in two respondents, followed by the U.K.
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Why Integration Should Be the New "New"
By Eunice Shin, Managing Director, Manatt Digital
M&A is not new news. Convergence throughout media and technology segments crosses our newsfeeds on a daily basis. And we are going to continue to see further acceleration of global M&A activities throughout these segments.
What's fascinating to me, though, is not the pace or the growth of convergence, but the consistent gap I see in these activities—most notably for integration. When it comes to convergence in the digital media world, integration has become one of the biggest challenges and missteps for both buying and targeting companies. The findings of our report further support this notion and show that while there is consensus that integration exists as the primary concern for organizations conducting M&A, the majority of interviewed executives rarely cite it as a priority in their due diligence process. This imbalance highlights a significant missed opportunity for companies to fully understand a vital component for a given deal that can frankly make or break success in the long term.
When it comes to a transaction itself, the stakeholders involved in the deal are most often not the same stakeholders as those in the actual execution of operations. For buyers, teams of corporate development and strategy, finance and legal stakeholders shake hands at the close of a deal, and then they are off to the next opportunity. As our report shows, integration is not prioritized despite the level of risk it brings to the success of the investment or acquisition.
Inherently, start-up cultures thrive on risk-taking, testing, failing/learning—all towards a spirit of innovation and growth. And historically, traditional conglomerates fear risk due to the potential broader impacts and ripple-effects of failure, and are structured with a level of governance and steering committees that include various stakeholders to vet and approve any new idea. Seasoned executives are incredibly talented and have seen success in the business models and structure that have been fairly consistent for the past few decades. But we are seeing more and more executives increasingly resistant to embracing the massive technology disruptions that are significantly changing the business models and structure of their industry. Digital transformation of the media industry is hard work. Organizational structures, work flow, incentives, and leadership all need to be aligned to embrace innovation and a digital speed-to-market. Furthermore, cross-border acquisitions add another layer of complexity to the mix. These are times of big risks, insecurity, and unknowns. So when these companies come together in M&A, many buyers are finding digital talent running for the next start-up. Talent is lost. Momentum is lost. And the potential to 10x that investment is lost.
Without a doubt, inorganic growth is fundamental and should continue at a robust pace in order for the media and technology markets to evolve. However, changes need to be made to better position buying companies to find success in optimizing their investments. Integration considerations should be assessed during due diligence, factoring in company cultures, leaders and influencers, success/growth factors and levers, as well as smart earn-out structures. Integration planning should be well under way once a transaction is closed, with objective facilitators to guide the process with the integrating companies. Integration doesn't always mean the folding in of people, products, processes, and technology. Smart integration often can mean a hands-off approach. But whether it be a loose or tight integration, an integration strategy factors in accurate communications across all levels of the company, setting expectations and having integrity in the execution of the integration—based on and led by the objective understanding of success factors in development products/assets, team culture, and company values for both integrating companies.
Manatt Digital understands both the digital-first, start-up world and the traditional, well-established buyers. We work with both buyers and targets, and understand the strategic drivers and challenges of the converging worlds. Our understanding and experiences allow us to effectively navigate the business and individual obstacles in change and transformation. We are working with companies on developing smart and thoughtful integration strategies and management to maximize the opportunities in these game-changing deals.
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