EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.
How EY can help
-
Discover M&A advisory services from EY when you buy and integrate. We help enable strategic growth through integrated mergers and acquisitions, joint ventures and alliances.
Read more
Many acquirers who pay a digital M&A valuation premium to buy transformative businesses, driven by technology, fail to put in motion the planning and integration steps needed to create value. Take a consumer company that announced the sale of an asset that was no longer core to its business. On the surface, the sale made sense, as it was a digital asset that didn’t fit the company’s long-term strategy. But the sale price of the asset was a significant discount to the purchase price a few years earlier, despite the platform’s success and a significant increase in the use case for its product.
So, what happened? It is an example of an industry mash-up where a business purchased a digital asset without a clear idea of how it fit into the organization’s ecosystem or the value creation possible through successful M&A integration. Unfortunately, as valuation professionals, we have worked with executives, including chief financial officers (CFOs) and chief digital officers (CDOs), on many digital acquisitions where it can be clear to us during the purchase process that companies are likely to revisit the asset in the future as part of impairment or other financial reporting write-down exercises.
As more companies consider digital assets as part of their inorganic growth strategies, it may be helpful to focus on those steps that will improve the chances of success. The best run processes likely have well-thought-out value statements that consider not only what the target organization brings to the table on its own, but also the synergies that will be created by combining it with an existing ecosystem. When there is a strong understanding of value, diligence can focus on areas that inform forecast models and support the business case presented to the board. Integration activities then follow to allow value capture and potential success in the long term.
Understanding how to quantify value in this context can be critical and here we present three considerations based on our experiences in digital M&A valuation.