Disruptive events tend to accelerate existing trends, and COVID-19 is no exception.
Technology is transforming the way businesses operate, the products and services they offer and is reshaping the global M&A landscape – and the speed of adoption is significant.
Data from a study published by Freshfields Bruckhaus Deringer on the constituents of the S&P Global 1200 (the world’s largest public companies) indicates that the S&P Global 1200’s spending on digital/tech assets almost doubled between 2013 and 2014 and doubled again over the following two year period, rising to a new high in 2017 of US$258 billion. The research highlights that big business is more willing than ever to pay large sums for digital/tech assets reflecting the often-existential importance of digital transformation in an increasingly connected world.
The willingness of big businesses to ‘bet big’ on digital/tech deals is also a sign of the long-term potential returns that buyers expect to realise from digital and tech assets such as data or online platforms.
The hidden challenges of digital M&A
Many companies consider mergers and acquisitions (M&A) as the best, or at least the fastest, way to build their digital capabilities. However digital/tech businesses often carry hidden complexities requiring a tailored approach to due diligence and deal structuring. These businesses may have complex risk profiles due to their fast growth, new business models and tendency for lower legal spend and approach to risk mitigation and management, while much of their value may be tied to intangibles such as know-how, software or data that may have unclear provenance.
Simply applying the standard M&A process risks missing many of the most important exposures and value drivers associated with a digital/tech asset. When buying a digital/tech business, the due diligence process needs be designed around the asset’s key value drivers and risks, which will be subtly different depending on the target business’s sector. Experts who understand technology will need to work alongside M&A specialist teams.
Buyers should also be mindful of emerging regulations that could threaten future revenue streams. Regulation is becoming more demanding around technology deals as authorities look to protect public interest and limit perceived threats to national security posed by foreign acquisitions.
Buyers should always closely inspect the target’s legal rights over its data and intellectual property, whether data is licensed or distributed by the target, and consider data protection compliance where the target’s data includes personal information. It is vital for buyers to secure control of usage rights for this intangible property, particularly in software companies where ownership can be threatened by the target’s use of open-source software or its relationship with its developers.
Reviewing cyber resilience/security is another essential, especially if the target’s value is tied to its data. Carefully considered deal terms can help when the unexpected occurs (for example, Verizon famously shaved $300m off its valuation of Yahoo! when major data breaches were disclosed after the deal was executed). How a buyer approaches cyber due diligence depends on a variety of factors including the nature of the target’s technology systems, the buyer’s negotiating stance (for example, the buyer may decide to carry out a detailed review of the target’s cyber security risk profile in exchange for receiving more limited or no warranties) and the target’s sector (more detailed due diligence will be needed in highly regulated and complex industry sectors, such as energy, finance, infrastructure or telecoms). If cyber security is likely to be a big issue, the buyer may want to bring in specialist technical consultants who work alongside legal advisors during the due diligence process.
A buyer should also carefully consider its approach to warranties and indemnities when purchasing a digital/tech asset. Among others, buyers should obtain warranties that the target complies with data protection laws, regulator guidance and industry standards, that it has rights to use all the data collected/generated, and procedures in place for responding to data breaches.
When buying a digital/tech business it is crucial your advisors understand the asset or company you’re buying, what questions to ask, and how to tailor the due diligence process to the specific target. Our internationally recognised M&A team is supported by an equally recognised Technology, Media and Telecommunications (TMT) team. With extensive experience ranging from large transactions to regulation, our experts provide clients with informed commercial, strategic and practical advice. If you would like to learn more about our experience or discuss how we can help you navigate a technology-based M&A, please contact us today.