Need for technology will drive more M&A in 2018

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Mergers and acquisitions are being driven by the need for technology. (rawpixel)

Traditional retailers acquiring digital companies has become familiar news in 2018. For example, Nordstrom picked up MessageYes, Amazon bought Ring and Target acquired Shipt. 

Accenture recently released research examining how technology is changing M&A, and the takeaway message was that mergers and acquisitions are primarily being guided by retailers' strong need for next-generation technology. In fact, 46% of those retailers surveyed said the need for new technology triggers M&A, compared with 42% across all other industries. 

After an M&A, 70% of the retail companies left their acquisitions as standalone business and 25% of the acquired companies were partially integrated, and 5% were entirely integrated. 

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While the number of deals in the consumer and retail sectors dipped slightly in 2017, Frank Layo, managing director at Kurt Salmon, part of Accenture Strategy, says the number of deals are expected to rise this year as retailers look to bolster e-commerce capabilities and drive innovation. 

"Given the current challenging market conditions, acquisitions are a good vehicle to quickly gain cutting-edge technology and talent which can help retailers increase competitiveness," he told FierceRetail.

So what's driving this M&A trend? Layo says that 2018 has started off rough. As the 2017 holiday season hit record high sales since the Great Recession, the numbers quickly fell again in the first few months of year. In addition, defaults by retailers reached their highest level ever in the first quarter. 

"All retailers are being challenged by changing market conditions, consumption habits and technological disruption. It’s forcing many to rethink their growth strategy," Layo said. "As a result, over the course of the next year we’ll see many retailers—particularly traditional legacy brands who are under increasing pressure from e-commerce players—acquire digital companies in quick succession to accelerate growth by bolstering e-commerce capabilities and enhancing the overall omnichannel experience."

The M&A process is not without its challenges, as digital deals are very different from what traditional retailers are used to. Companies need to do extensive research before acquiring a digital entity. 

"Very often the technologies are cutting-edge, highly specific and not yet fully tested for viability," he said. "Furthermore, traditional valuation models were not built for digital assets and can break down as a result. It’s critical to use a different pre-deal team and evaluation criteria for digital M&A transactions compared to traditional acquisitions."

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In addition, once an acquisition is complete, the next major challenge is integrating culture. Layo says that retailers who fail to integrate diverse cultures and skills  are not able to reap the full value of the deal.

Of course, retailers can't forget the positives that can come out of a new merger or acquisition. It's a quick way to gain cutting-edge technologies, onboard new talent and accelerate their competitiveness. 

"Another benefit is that with all the disruption available to purchase, retailers can refocus their efforts on their core business and not dedicate as much resources to internal innovation," Layo said.