Most dealmakers draw on a broad range of resources throughout the process of setting M&A strategy and targeting, and due diligence, both internally and externally. This is especially crucial in digital media and technology—fast-moving industries where competition for transactions is tough and risk levels are elevated. “M&A requires the involvement of a wide group,” argues the managing director of a Hong Kong-based investment bank. “You need specialized people for particular tasks and no single team can handle all the responsibilities.”
As
Figure 14
reveals, that spread comes into play right from the beginning, as M&A targets are sought. Nine in ten respondents in this research use an internal M&A team to identify potential targets, but dealmakers draw on other resources too. Almost two-thirds (64%) employ legal advisors at this early stage, more than half (53%) use strategic consultants and more than a third (39%) work with investment bankers or other financial advisors. It is also interesting to note the use of technology, with 36% of dealmakers relying on online research tools (such as Mergermarket). Nevertheless, there are omissions here too. Most obviously, slightly less than three-quarters of respondents (74%) say their senior management is engaged in M&A strategy and targeting. It may be that only certain members of the leadership team are embedded in the strategy unit, but those outside of the tent will need to provide their input at the earliest possible stage.
Figure 13
shows that, for half the respondents in this research, a roughly equal balance of internal and external advisors drive the strategy and targeting process, with very few companies—just 11%—more dependent on outside advisors.
Figure 13: Internal or external strategists?
Who do you rely on more in the strategy/targeting process – internal team members or outside advisors?
However,
Figure 15
flags another potential flaw in the targeting process of some dealmakers: While more than half those dealmakers that conduct cross-border deals (58%) regard the services of local specialists in targeted markets as essential, a significant number (42%) don’t think this is crucial for every deal.
That may leave dealmakers open to unnecessary risk, given the difficulties of cross-border M&A in the digital media and telecoms sectors—from legal and regulatory issues to the potential for cultural mismatches. It also contrasts with the position on due diligence, where 81% of dealmakers regard having country or regional specialists as crucial for every cross-border deal (see
Figure 18
).
Once dealmakers do get to the due diligence stage, they show the same determination to draw on a wide range of resources to ensure they make the right judgments. As
Figure 17
shows, more than nine in ten respondents (93%) employ third-party due diligence firms when conducting due diligence—likely to be higher in digital media and technology acquisitions than in other industries, given the detailed and specialist work required to get this right—while almost as many (90%) rely on their own internal teams.
“It is difficult for any single team to get the best results,” insists the head of M&A at a Norwegian business. “We prefer to involve experts from every relevant field. As a result, the work gets done more quickly and the quality of the inputs is higher.”
Again, however, it is surprising that the number of dealmakers engaging their senior management teams in due diligence efforts is more limited, at 70%, particularly if diligence extends to considering issues such as strategic fit and cultural alignment. Many businesses do rely heavily on their legal advisors, with 70% looking to these consultants to provide detailed diligence work.
Finally, it is worth pointing out that, while 80% of respondents are prepared to take their time over due diligence—and to extend their timelines if necessary to complete the vetting process—20% are focused on finishing the process quickly. While beating the competition and securing synergies are understandable drivers of the desire for speedy diligence, it is important dealmakers do not expose themselves to unnecessary risk. “The prime reason to conduct due diligence is to obtain all relevant information of value, so we do not hurry,” says the senior vice president of a U.S. business. “We expand the diligence timeline according to need, because finishing in urgency, curbing the time you have available, only causes losses.”
Figure 14: Where M&A strategy/targeting is conducted
When conducting strategy/targeting for digital media and frontier technology acquisitions, which types of resources do you typically use?
Regional breakdown
Chinese acquirers practice self-reliance
One of the starkest differences found between Chinese and Western acquirers in our survey appeared in answers to questions regarding the use of internal team members vs. outside advisors in due diligence, as well as targeting and integration. While just 4% of U.S. and European respondents said they rely most on their internal teams during due diligence, 38% of Chinese respondents said they do. In addition, while over 80% of U.S. and European participants said global resources are crucial for every cross-border deal, just 52% of Chinese participants said they agreed. This was led by Magic Leap’s US$793M series C fundraising in February.
Chapter 2: Ready, Aim, Acquire
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Figure 19:
U.S. vs. Europe vs. China: Who do you rely on more in the due diligence process—internal team members or outside advisors?
Figure 21: Due diligence imperatives revealed
When conducting due diligence on a potential digital media or frontier technology acquisition, which aspects of the process do you think are most vital?
Valuing a target’s real assets, including data, technology and hard assets
60%
Identifying legal/regulatory issues
41%
Assessing the value of existing and target audiences/consumers
36%
Identifying underlying red flags
28%
Evaluating financial health and forecasts
28%
Valuing a target’s intellectual property + proprietary technology
22%
Evaluating the competitive landscape
21%
Identifying potential synergies
18%
Evaluating human capital and interdependencies
12%
Evaluating IT + cybersecurity infrastructure
12%
Vetting senior management’s knowledge/expertise
11%
Planning for potential integration issues
9%
Vetting non-senior employees’ knowledge/expertise
2%
Case study
Helping create a “great buyer”
Rapid speed through inorganic growth was the mandate for a global media company. Based on prior difficult integrations and in preparation for the execution of this strategy, our client asked Manatt Digital to position them to be a world-class buyer.
The goal was to make each acquisition effective and efficient from start to finish, creating the need for a standard approach for due diligence, transaction and integration across processes, systems, organizational and operational planning and legal procedures. By drawing on Manatt Digital’s full-service capabilities and breadth of experience, our client asked Manatt Digital to create a deal-flow process. We leveraged best practices while providing a custom solution tailored to meet the company’s objective. With a target under LOI, we initiated the due diligence process, evaluating all aspects of the company, including operations, sales, finance, product, data, systems and human capital. We made immediate recommendations and identified risks that were critical to the overall transaction.
The strategy was smart. We helped make our client more efficient in their acquisition practices, nimble enough to quickly respond and move on to new target opportunities without timing or process constraints, and able to not deflate the excitement and critically important “spirit” from a deal. This approach is instrumental in effectively optimizing the investments and helping our client reach their growth potential.
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Figure 22: The difficulties of getting due diligence right
When conducting due diligence on a potential digital media or frontier technology acquisition, which aspects of the process do you think are most challenging?
Valuing a target’s real assets, including data, technology and hard assets
60%
Identifying legal/regulatory issues
41%
Assessing the value of existing and target audiences/consumers
36%
Evaluating financial health and forecasts
28%
Identifying underlying red flags
28%
Evaluating the competitive landscape
22%
Valuing a target’s intellectual property + proprietary technology
21%
Planning for potential integration issues
18%
Identifying potential synergies
12%
Evaluating human capital and interdependencies
12%
Vetting senior management’s knowledge/expertise
11%
Evaluating IT + cybersecurity infrastructure
9%
Figure 17: Due diligence is a team endeavor
When conducting due diligence for digital media and frontier technology acquisitions, which types of resources do you typically use?
Figure 15: The need for regional resources
How important is it that the strategy/targeting process for cross-border deals include regional and/or global resources (i.e., company employees or advisors in the country/region being targeted)?
Figure 16: Internal or external diligence?
Who do you rely on more in the due diligence process—internal team members or outside advisors?
It is also striking that dealmakers are significantly more likely to rely on outside advisors for due diligence than for targeting and strategy. As
Figure 16
shows, while half the respondents (51%) to this research say they depend on a roughly equal balance between internal and external advisors, more than a third (37%) rely most on external consultants—more than three times as many who said the same for targeting and strategy.
The specialist nature of the due diligence process—and the traps businesses can fall into by missing something important—is crucial here. And where deals have an international dimension, this becomes more important still; the vast majority of dealmakers depend on local experts to help with due diligence during a cross-border transaction (see
Figure 18
).
Figure 18: The need for regional resources
How important is it that the due diligence for cross-border deals include regional and/or global resources (i.e., company employees or advisors in the country/region being targeted)?
It is clear that the due diligence process is not straightforward when it comes to digital media and frontier technology transactions.
Figure 21
and
Figure 22
reveal that the three aspects of the process respondents consider most crucial for deal success are also the three most challenging tasks to get right.
The list of challenges is led by the difficulty of valuing a target’s real assets, cited by three-quarters of respondents (75%). In businesses where subjective judgments such as the value of data and proprietary tools may be required, this is indeed a difficult task. This is one reason why so many companies depend on external advisors to help them with the due diligence process.
Related to that is the question of intellectual property, another crucial consideration in many technology and media deals—and cited as a due diligence priority by more than a fifth (22%) of respondents. The fact that only 16% see it as a challenge may suggest an element of complacency.
It is also striking that, while more than a third of respondents (36%) see it as vital to assess the value of the target’s existing and potential markets, an even greater number (39%) regard this as one of the toughest challenges. The figures underline why so many participants in the digital media and technology M&A space see the potential for misjudging the potential of a company or market as such a big risk, as we saw in
Chapter 1
.
This is not to downplay other substantial due diligence challenges where dealmakers may require expert assistance. Significant numbers of respondents point to challenges, such as the need to evaluate financial health, the difficulty of identifying underlying red flags, and the integration planning process.
Figure 20:
U.S. vs. Europe vs. China: How important is it that the due diligence for cross-border deals include regional and/or global resources (i.e., company employees or advisors in the country/region being targeted)?
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Fig. 20
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