65% anticipate that as much as one-tenth of their total capital budget
will be allocated to digital initiatives over the next three years. More
than 33% projected it could even be higher.
In an effort to pursue digital transformation, many companies will
likely turn to one of three possible solutions:
1. Buy digital capabilities through acquisitions, usually requiring
a series of deals that are part of a larger acquisition strategy.
2. Build the capabilities themselves, organically.
3. Sell the company or a stake of the business to a private equity
firm that can fund and help orchestrate such a transformation.
Each option comes with its own considerations and challenges.
While acquiring a way toward digitalization goals seems to be the
simplest alternative, these deals can differ dramatically from more
traditional acquisition transactions.
For instance, just as due diligence tends to be more difficult for
vertical transactions, acquisitions of digital assets can bring several
new considerations. Scalability and customer-acquisition costs are
perhaps most critical, but buyers will also want to understand the IP
being acquired and the state of the code that supports the target.
As digital assets are typically more expensive than conventional
acquisitions, how these transactions are financed can also make or
break the deal. All-cash purchases, for instance, often leave buyers
susceptible to overvalued goodwill. Beyond tapping into the debt
markets, many buyers will also incorporate mechanisms such as
earnouts into the transactions to de-risk the investment.
When luxury retailer Nordstrom acquired digital retailers
Hautelook and Trunk Club, it negotiated sizeable deferred payments
dependent upon reaching certain milestones. Given Nordstrom’s $197
million write down on Trunk Club earlier this year, these types of safeguards can look canny in hindsight.
The finance industry is not immune from the digital disruption we have witnessed over the past few years. As restaurants replace cashiers
with kiosks, financial advisors face off against computer
algorithms and even taxi drivers — already dealing with
the ubiquity of Uber — now envisioning a future that
promises self-driving cars, lenders are beginning to
grapple with this brave new world.
Ten years ago, few of us in the lending business
imagined we’d be competing against peer-to-peer platforms that could automate underwriting. For those
intent on survival, the question will soon become how
to pay for it all.
Eventually, the investment in digital technology
will pay for itself through some combination of new
customer growth, client retention or new efficiencies.
However, these initiatives require considerable upfront
investments that precede the ongoing recurring costs
required to maintain and build upon digital strategies.
According to a recent Ernst & Young survey of more
than 600 non-technology corporate executives, nearly
Paying the Piper:
Acquiring Digital Technology
Without Breaking the Bank
BY MARK SOLOV Y
As every sector contends with tech-enabled disruption, Mark Solovy discusses the three strategies —
buy, build or sell to private equity — that companies can use to acquire new technology at a reasonable cost.
MARK SOLOV Y
Business leaders who don’t have digital backgrounds will
often underestimate the time required to put comprehensive,
enterprise-wide digital initiatives in place. Many also overlook
the potential ripple effects that can spread across the business
during the rollout and after the initiative is complete.