Are you chasing the right digital assets?

Success in digital M&A requires a clear strategy that guides target selection, due diligence, and integration.

The strategic importance of digital mergers and acquisitions has risen greatly in recent years as companies realize that digital capabilities are critical factors differentiating performance leaders from also-rans. Deals involving digital assets have increased significantly over the past year as signs of a nascent recovery spurred companies to jump back into acquisitions.

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But buying technology companies entails some unique challenges. Identifying targets and ensuring they can fulfill the acquirer’s ambitions requires companies to adapt how they approach each phase of the deal.

Two areas in particular trip up many companies. On the front end, buyers need to define a clear rationale and value-creation thesis for digital M&A that supports the corporate strategy. Then, once a potential target is identified, acquirers should match the diligence and integration approach to the unique value the deal aims to capture.

Establish a clear digital M&A strategy

All too often, companies take a “ready, fire, aim” approach to digital deal making, launching into acquisitions before they identify precisely what they hope to gain and how a given digital asset will help them accomplish the broader corporate strategy. If your goal is to dominate a multibillion-dollar market within 18 months, acquiring even several small companies is unlikely to achieve that target. Likewise, if you aim to gain access to 50 critical engineers and a patent, buying a 2,000-person firm is hardly a cost-efficient way to acquire those capabilities.

All too often, companies take a “ready, fire, aim” approach to digital deal making, launching into acquisitions before they identify precisely what they hope to gain.

Establishing a clear strategic intent is the essential first step. The wide range of possible motivations—from disrupting existing markets, to gaining access to new customers, to building digital capabilities—makes the universe of potential targets vast. The question you should ask is, What types of deals will accelerate the corporate strategy? The answer typically centers around four core rationales: gaining access to a customer-ready offering, distinctive technology, or specialized talent, or entering an adjacent market. Some targets may fulfill more than one strategic intent—for example, providing access to a niche market while also delivering critical intellectual property (IP)—but a primary focus that supports the company’s overall strategy should guide target selection.

Customer-ready offering: In this scenario, the acquiring company wants to add a product or service to extend or fill a gap in its existing portfolio in order to gain revenue synergies. The acquirer may additionally want to consolidate the number of vendors its customers use and establish deeper relationships with clients by providing a fuller slate of well-tested products. The buyer already has channels, sales capability, and possibly unique access to customers that makes it a “natural owner” of the asset—an advantage that our research shows correlates with growth outperformance and higher shareholder returns. On the flip side, the target gains the opportunity to grow the business much faster than it could on its own.

For example, when a global industrial-equipment provider wanted to enhance its equipment-inspection service, it purchased a company with distinctive products in industrial 3-D video analytics. The target was small but had a handful of loyal early customers and was gaining traction commercially. By combining the target’s proven technology with the acquirer’s established brand, worldwide reach, and customer support, the transaction brought the target’s automated inspection system to a wider range of customers in many more industries than the start-up would have been able to reach on its own.

In such scenarios, targets are typically small companies with one or two offerings and enough reference customers to attest to those offerings’ value. In some cases, the companies may not yet have a sales force; in others, a small sales force exists where the CEO and other top executives still play a lead role. In both situations, the buyer’s more sophisticated sales capability can accelerate customer adoption of the targets’ technology.

Distinctive technology: Sometimes the acquirer is seeking a distinctive technology or IP. It could be an algorithm or a digital analytics technique that would complement internal R&D efforts or could be integrated into an existing product line. Valuable trademarks and brands may also be attached to the target technology or patent. In this scenario, the acquirer can help a start-up’s technology gain immediate commercial traction while enhancing its own offerings.

Take the case of a digital-mapping company with innovative traffic analytics technology for vehicles. The target focused on the public sector, where procurement usually moves slowly and can be sensitive to election timing and outcomes—a potentially deadly combination for a lean start-up. When the business ran out of cash, a large consumer-oriented company purchased the rights to the intellectual property at an attractive price, and instead of continuing to pursue sales directly to the government, it deployed the underlying algorithms and technology to enhance its existing vehicle-management platform that already had an established customer base.

Buyers following this strategy need to do strong technological due diligence (more on this later), given that the assets they hope to acquire often lack proven commercial viability or scale. They will also likely need to make significant investments to get the technology to a customer-ready state, making the deal take longer to accrue value. Retaining key developers or scientists along with the technology or IP may also be an important concern.

Distinctive talent: The world is full of digital start-ups and boutique consultancies that have built strong teams but struggle to grow revenues, perhaps due to market timing or high cost of sales, and their investors are looking for an exit. Buying such a company for its talent is a time-honored way to scale a bench of digital capabilities quickly. For example, when a start-up in the online credit space with a highly regarded core engineering team found itself losing the battle against bigger financial services firms, a large investment bank “acqui-hired” its roughly 20-person engineering and product team and put them to work on upgrading its own credit portfolio. In a single deal, the bank got a team with a track record of technological achieve­ment, management know-how, and comfort working together, all in a fraction of the time it would have taken to build such a team organically.

Sometimes, the target company will come with useful intellectual property, but such deals are largely driven by a talent-acquisition strategy. The main risk in this scenario is retention of key talent, and any transactions should be structured to provide incentives for employees to stay a minimum of two years.

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Beachhead in an adjacent market: A company seeking a foothold in a new market may choose to buy digital assets that enable it to build on the targets’ combined talent, products, go-to-market strategy, and operating model. In this approach, there is usually an anchor acquisition that has enough scale and installed base to stand alongside the buyer’s core business and can be further strengthened by the acquisition of additional assets. If the buyer is already active in the adjacent category, its aim may be to strengthen its position by buying one of the market leaders or by acquiring an asset that has a solid regional customer base or channel relationships to expand its presence in a geographic area. But sometimes an installed customer base does not serve the acquiring com­pany’s goals, in which case reevaluating whether to keep that base may be in order (see sidebar “When should you fire a customer?”).

One large financial-services company, for example, entered the adjacent online vehicle-sales market by acquiring a digital platform for car owners. The company then built an analytics-enabled solution for online car research and through subsequent transactions added financing, secondhand cars, and repair services, resulting in an integrated online portal for car users.

Given that the different rationales require distinctive approaches to targeting and vetting potential acquisitions, executives should ask themselves: How do these acquisitions support the overall strategic goal? How is value created by these M&A plays? Once the leaders are aligned on the M&A aspirations, they can quickly evaluate whether a prospective acquisition can meaningfully contribute to realizing the strategic goals and investigate the target’s ability to deliver on its promise.

Confirm and capture the target’s value

As with target selection, the approach to due diligence and integration should align with the buyer’s strategic intent, as different rationales will put greater weight on different aspects of the deal. While gaining cost efficiencies will sometimes be a factor in a digital deal, four other dimensions tend to dominate diligence and integration: technology, revenue synergies, talent, and operating model.

Technology: The advent of cloud, infrastructure automation, machine learning, and artificial intelligence can enable suppliers to respond to customer demands with distinctive and powerful solutions. However, these sophisticated technologies add complexity to the underlying architecture for applications, data, security, and infrastructure. Innovative software may mask inefficient architectural design that could produce scalability problems as the product’s customer base grows and may require expensive software redesign work. Additionally, the product may contain “tech debt” of unfinished work accumulated during the race to get the solution to market. Also, a great product on a stale or dated technology stack will be hard to keep current, making it difficult for the acquirer to remain competitive in the market.

Such potential challenges should be identified and reviewed during the diligence phase. Establishing a technology diligence framework can help buyers peel away the layers of complexity and replace hype and buzzwords that tend to accompany the M&A process with a factual perspective. This diligence should aim to answer four questions:

  • Does the target company have the right technology stack and architecture to successfully deliver its promised product or service to the market?
  • Can the target’s current technology stack and architecture ensure an enduring competitive edge?
  • Does the technology stack contain areas that may require significant investments after the acquisition?
  • How will this technology or product integrate with the buyer’s own technology, and what costs will the integration incur?

Furthermore, potential acquirers should examine the target’s product road map, ensuring it prioritizes the features and technology components that matter most to the buyer. When one nondigital company bought a software firm, for example, it relied on customer interviews to guide changes to the target’s product road map, adding or accelerating features that were critical for the combined company’s value proposition. Whenever possible, buyers should also assess the track record and capabilities of the key technical talent—a step particularly critical with smaller targets that have no or few customers.

This technical assessment done during diligence will create a foundation on which the buyer can build during the integration. If the strategic rationale hinges on a combined technical platform or product offering, deciding how to harmonize the acquired technology, team, architecture, and road map with the buyer’s existing assets will be a top integration priority.

Revenue synergies: While quantifying a proposed deal’s upside potential is a key aspect of due diligence, gaining a clear understanding of how to achieve those synergies is just as important. Revenue synergies are notoriously difficult to estimate and are harder to capture than cost synergies, so acquirers need to know what it will take both operationally and financially. For example, does the opportunity lie in using the acquired asset to cross-sell and upsell existing products? Is the core value instead in integrating the target’s product features into the acquirer’s offering to gain new customers or increase stickiness of current ones? Or, can significant additional sales be generated when the target’s product is plugged into the acquirer’s larger distribution channel?

To capture the revenue synergy potential, the integration phase needs to mobilize the right people in both organizations to seize the biggest oppor­tunities. In one B2B software merger, for example, early integration focused on identifying a handful of high-potential cross-sell plays, along with a shortlist of customers for each opportunity, and setting up a sales process and incentives that would motivate the sales teams to pursue those priorities. In the medium to longer term, the joint company adjusted the acquirer’s various product road maps to add key features from the target’s technology, synchronized pricing for the combined product portfolio, and reorganized and trained the sales force on the combined product set. In another deal that involved a hardware company acquiring a nascent software business, the buyer inserted a sales leader into the target’s business to create a link with the acquirer’s sales force.

Talent: Understanding the caliber of the target’s team and the desire of key talent to stay with the merged company is a diligence priority in all M&A. In digital deals, the technical and commercial talent is often the most important. Once the deal is announced, identifying and retaining individuals deeper in the organization who are disproportionately productive is especially critical. These are often, though not exclusively, technology, product, and sales professionals. Having one-on-one discussions to understand what motivates them and delivering career opportunities that satisfy their aspirations can often make or break the deal.

Operating model: When entering the diligence phase, the acquirer should have a hypothesis about how the target business would operate within the combined company, one it then refines during integration. In deals that fall into the first three strategic rationales—customer-ready offering, distinctive technology, and distinctive talent—the target will likely adopt the acquirer’s operating model and management practices. Through talent exchanges between the two organizations, pairing up key individuals from the two entities, and addressing differences in decision making directly with the target’s employees, leaders of the merged company can start to embed a unified culture.

Buyers that acquire digital assets to enter an adjacent market, on the other hand, will often choose to give the acquired business more independence or bring elements of its operating model into the combined company to foster higher agility and more innovative approaches. When a hardware or traditional software company acquires a business with a software-as-a-service (SaaS) operating model, for example, the buyer’s focus may be ensuring that the target abides by the “Rule of 40,” which states that an SaaS company’s growth rate when added to its free cash flow rate should equal 40 percent or higher.


Digital acquisitions can empower companies to expand their existing products and services into new or adjacent markets and to develop entirely new offerings and business models. As a result, active digital deal makers tend to outperform their industry peers. However, digital M&A involves some unique challenges, making a clear, up-front strategy—along with a diligence and integration approach that supports this strategy—essential before acquirers venture into the M&A arena.

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