What happened
Early disruptors were often owned by private capital or visionary private equity firms. As these disruptors scaled, more capital was needed, and with sufficient backing some were able to overthrow existing markets and create new ‘blue oceans’. Encouraged by such tech success stories, private equity funds began to see the potential of high-growth scale-ups; and not long thereafter corporate investors also turned their attention to disruptors – especially as they sought ways to leapfrog their own digital transformations.
Acquisitions in the digital space posed new challenges for investors. Traditional due diligence focused on market size and EBIT multiples (earnings before interest and taxes), but these proved meaningless when dealing with entities that sought to create new markets, and reinvested everything they had to fuel rapid growth. A forward-looking rather than backward-facing due diligence was required – one that was able to focus on capabilities, technology, organization and data, and crucially, on how well these entities were set-up to scale and how fast the disruption was happening.
On the other side of the sale, early disruptors and digital natives faced challenges too. Pre-sale, they often struggled to showcase their true value in ways traditional investors could understand. Then post-acquisition, they often found themselves being pressured by investors to improve traditional KPIs like EBIT and cashflow, whereas as digital natives, they preferred to focus on digital talent, investing in technology, and measures like customer lifetime value (CLV) and customer acquisition costs (CAC). Meanwhile, corporates that had bought disruptors as a means to leapfrog their way to digital success often ran into problems as synergies between the two proved limited. Corporate-led integrations usually reduced headcounts and pushed for standardization of processes, frequently undermining the talent and experimental ‘test and learn’ approach that had made the disruptors successful in the first place. Value ended up being destroyed as often as created.
Our role
We learned the fundamentals of disruption by working with early disruptors, and were involved in discussions with the visionary funds that backed them. Our digital heritage has allowed us to support many ‘sell side’ and ‘buy side’ clients, and over the years we have worked with multiple private equity funds to review their investment portfolios, identify digital gaps and opportunities, and perform due diligence on investment prospects. We have changed views on how valuation needs to be done, and built skillsets to assess the scalability and potential of disruptors and their business plans, even when they have no assets beside talent and off-the-shelf technology (with assessment based instead on, for example, capabilities, organizational structure, data, threat of new disruptors).
We have also supported M&A teams in traditional companies in spotting new investment opportunities, making buy-or-build trade-offs, and shaping the conditions for new acquisitions to flourish. And on the flipside, we have helped digital natives develop their business plans, showcase their value to investors, and protect their fundamentals by teaching investors why different measures are best used to understand and steer their growth.
Both our private equity and corporate venturing clients have seen the value of digital M&As. Investors benefit from opening their portfolios to new growth and decreasing dependency on dated business models. And corporates benefit from acquisitions that support company-wide digital transformation – especially when the target provides a needed technology, solution, or position in the value chain.
Client cases
We supported Adecco by conducting due diligence on a series of digital pure players across the world to help accelerate their digital transformation.
We performed due diligence and provided support for Gilde Buy Out Partners in their acquisition of Albelli, a leading player in the European online B2C ecommerce photo market.