Arnaud Leroi: The Changing Rules for Digital M&A

As companies turn to M&A to accelerate their digital strategy, they're realizing the rules of traditional acquisitions don't apply. Arnaud Leroi, who leads Bain's M&A practice in Europe, the Middle East and Africa, outlines four critical steps that successful companies take to execute digital M&As.

Read the Bain Brief: The Changing Rules for Digital M&A

Read the transcript below.

ARNAUD LEROI: So many companies these days are turning to M&A to see how it can help them accelerating their digital strategy. Now, when they move to execution they realize that the same rules of traditional M&A do not apply to digital M&A. Bain research shows that only 11% of the top executives feel that they are mature enough to execute on the digital M&A strategy. These ones actually apply a consistent approach across the four steps of the M&A process. Number one strategy—they clearly understand how these acquisitions will help them in the delivery of their strategy. A few years ago, when Publicis bought Sapient, it was a clear way for them to accelerate the transformation from a traditional advertising company to [a] digital advertising one.

Number two—financing. These digital assets tend to be quite expensive. We traced the question of how you buy them between stock and cash to avoid potential goodwill and depreciation afterwards. But more than that, it is important to think about more sophisticated payment mechanisms, such as earn-outs, to mitigate the risks afterwards.

Number three—due diligence. Doing a due diligence on the digital asset requires a much more forward-looking approach on the asset. It requires putting together some insights from ecosystem of the company to understand the value of what you are acquiring. But the second thing, it is important to understand how you can actually be a good parent to that asset. Being a good parent doesn't mean trying to see how this company will help you transforming your business, but the opposite: how your company will help accelerating the development of this digital asset that you are acquiring.

And the last point is the integration. Many companies buy these assets because they think it's going to help them accelerating the transformation of their company. But when they do that, they say OK, I'm going to do that and therefore integrate this company into my traditional business. But if I do that, I may kill what I'm buying. So we trace the question of how to develop a customized and personalized approach of the integration to keep these assets while helping you in your strategy. What is sure is that you're going to make mistakes in buying digital assets. These good companies tend to put in place a feedback loop to learn from these different assets that they are acquiring in order to improve and develop a repeatable, successful formula.

Read the Bain Brief: The Changing Rules for Digital M&A