Part One: How Cloud Helps A Portfolio M&A Strategy
Private Equity (PE) firms are continually looking at ways to accelerate and sustain business growth of their portfolio. One method which has become prevalent in the industry is the ‘buy and build’ approach. This is achieved by the Portfolio company (PortCo) creating a platform and pursuing additional acquisitions to increase business growth. McKinsey found in 2004 that add-on transactions made up 43% of PE deals, which has subsequently increased to 71% as of 2020.
Buy and build executed correctly can be a winning strategy. However, success depends on an age-old business challenge: post-merger integration. If executed poorly, an integration can result in unrealised investor returns or, even worse, diminished returns. Unfortunately, this isn’t uncommon. A recent Accenture study concluded that only 27% of merger and acquisitions (M&A) transactions resulted in both an operating margin improvement and revenue growth. The study goes on to show how successful mergers shared a key trait — each one had a long-term blueprint for intended synergies and operating model prior to the deal close.
This two-part blog post will walk through how cloud technology can support successful M&A integration.
A quick word on divestitures
Whilst this blogpost largely talks about cloud technology from a buy and build perspective, divestitures and carve outs can also significantly benefit from cloud technology, accelerating and even simplifying the overall process.
Enter Cloud Technology
One key aspect of a post-merger integration is how to combine the IT estates of both organisations. Integration between the siloes of a single firm can be a complex task. Combining the infrastructure of two separate organisations takes this challenge to an entirely new level.
PE operating partners and PortCo management teams are looking more often to cloud technology to support their portfolio merger activity. This isn’t surprising as merger activity has been rising since 2013 and technology has become a key enabler over time. A study referenced in the Harvard Business Review showed that technology is key to merger success, with 84% of executives agreeing that the CIO should have a seat at the M&A table.
The benefits to using Cloud Technology
Using cloud technology has both direct and indirect benefits when it comes to M&A.
Direct benefits include:
· Provides options to achieve an outcome: Cloud platforms are vast and have democratised even the most complex and nuanced technology into consumable services. This provides the freedom of choice and allows for flexibility on the level of integration and the approach. For example, a particular merger could look at existing IT system integration, whilst another merger with a more complex estate might choose to take a greenfield approach, architecting their estate to be better adapted to the cloud.
· Faster completion: By cutting provisioning times from weeks to minutes, reducing the barrier to entry, and providing a safe environment to perform proof of concepts quickly, cloud enables teams to focus on the post-merger activity without needing to consider wait times for hardware provisioning. This is particularly pertinent in 2022, with a world-wide silicon chip shortage extending hardware lead times.
· Supports smoother integration: When considering M&A activity without cloud technology, several factors are considered, as system integration and consolidation takes place. These can lead to large sub-projects to transfer data and create inter-network connectivity. On a cloud platform, this has been drastically simplified with storage services allowing replication with a few clicks and network peering available through another service respectively.
· Infrastructure provisioning: All cloud platforms provide a consumption model, allowing you to pay for what you consume, rather than heavy capital expenditure (CapEx) to right-size environments. When integrating as part of a post-merger, consolidation of technology will be top of mind. This leads to key application traffic (including business application traffic) increasing significantly as the consolidation is executed. The cloud supports the scaling of these systems on a consumption basis, rather than the purchasing of additional hardware.
· Exit valuation: Enterprise estates which have successfully adopted cloud technology often achieve higher exit valuations. A business that has also benefitted from a buy and build approach, with a tried and tested cloud platform to support M&A activity, will likely be a differentiator and provide future investors with additional confidence in the business.
The indirect benefits are the same as adopting cloud technology for your enterprise IT estate, including:
· Cost: change your cost base from a capital expenditure to pay on consumption.
· Speed: reduce infrastructure and service provisioning from weeks / months to minutes.
· (Global) Scale: access compute and scale services in the right geographic location at the point it is needed.
· Productivity: automate repeatable tasks allowing personnel to focus on more important business tasks.
· Performance: take advantage of the speed and efficiency in the latest computing hardware.
· Reliability: simplify back-ups, DR sites and business continuity processes through cloud services and features.
· Security: take advantage of security, policy, and compliance services to strengthen the overall security posture.
To find out more about these areas, explore the what is cloud computing page.
Part two will be posted next week. It’ll explore the key questions to ask as a cloud strategy is being created, along with some common approaches to M&A using cloud technology.
