Sea Fa Mna Small Gains Big Wins PDF

Small Gains, Big Wins
Disruptive M&A: Creating value through

innovation-led growth acquisitions
Small Gains, Big Wins
Brochure/report title goes here |
Section
| Disruptive M&A: Creating
title goes
value
here
through innovation-led growth acquisitions
Contents
Executive summary 1
The rise of disruptive M&A 2
Unlocking new sources of innovation-led growth 5

Disruptive M&A strategy
Building the opportunity pipeline
Corporate Venturing 2.0
Deloitte disruptive M&A framework
Identifying and executing the right deal 15

Are you the right buyer?
Valuation: reflecting risk and reward
Disruptive M&A due diligence
Negotiating with the founders
Creating value and delivering on the expected returns 20

Disruptive M&A integration
Cultural considerations
Delivering expected returns
2
2
Small Gains, Big Wins | Disruptive M&A: Creating value through innovation-led growth acquisitions
Executive summary
Disruptive innovation is high on many CEO agendas. The confluence

of rapid advancements in disruptive technologies, fundamental shifts
in consumer behavior, and the emergence of new digitally enabled
business models is lowering barriers to entry and allowing innovative
startups to disrupt traditional products, markets, and businesses.
The advent of disruption is also blurring traditional sector

boundaries, leading to the convergence of business models across
disparate sectors—including health, finance, retail, media, and many
others. This is creating opportunities for non-traditional players to
enter established markets with new market offerings and, in some
instances, effectively displacing the incumbents in those markets.
CEOs are now saddled with the twin objectives of responding to the
threats of disruption, while simultaneously harnessing these very
forces to create new “businesses of tomorrow.” Companies that do
not embrace this mind-set may risk being undermined.
Deloitte analysis shows companies spent about $880 billion on

mergers and acquisitions (M&A) between 2015 and 2018 to acquire
disruptive technologies and invested $220 billion through corporate
venture capital (CVC) units.1 A significant portion of these deals Ultimately, how companies implement these deals will determine
involved non-tech sector companies acquiring technology assets, whether they derive value from the transactions. This requires
and this represents a new paradigm in dealmaking. strong leadership that balances short-term market demands with
long-term transformation goals—and adopts a shift in mind-set
In addition to financial returns, these transactions offer access to the toward assimilating new business models and ways of working.
new technologies, talent, and operating models. The deal rationale
is often driven by the promise of revenue synergies, which are much This paper offers Deloitte perspectives across the three
harder to capture than cost synergies. life-cycle stages of a disruptive M&A deal:
1. Unlocking new sources of innovation-led growth

Due to these factors, disruptive M&A is inherently complex. These
2. Identifying and executing the right deal
deals require a strategic rethink at every stage of the process, from
3. Creating value and delivering the expected returns
deal origination in a fast-evolving ecosystem, to due diligence on
emerging technologies, and creating value from investments, which
As the rate of innovation and change continues to accelerate, the
also requires well-planned cultural assimilation of startups.
ability to successfully undertake disruptive M&A is expected to be
a defining feature of corporate growth story.
1
The rise of disruptive M&A
The rise in disruptive M&A deals has been one of the remarkable The CVC investment activity increased rapidly in 2018. There are
features of the M&A market in the last few years. The last two years approximately 773 active CVC funds globally—and more than 250
were particularly strong. As seen in figure 1, there were 7,377 deals: new CVC funds were established just last year. These CVC funds
55 percent were M&A acquisitions worth $387 billion and 45 percent have become active investors in the ecosystem, participating in
were CVC investments worth $122 billion.2 23 percent of all venture-backed investments in 2018.
The most active verticals by deal volume were digital and Another important trend is that CVC funds are now backing larger
social, followed by data and analytics, artificial intelligence and investments. In 2018, CVC funds participated in 1711 deals with
machine learning (AI&ML) startups. CVC saw 3,347 deals worth an average investment size of $56 million an increase of
$125 billion during 2017–18, with digital and social leading, 90 percent over 2017.4
followed by the AI and ML startups.3
Figure 1. Disruption in numbers
Global disruptive M&A and CVC activity (2017–18)
Deal volumes (2017–18) Deal values (2017–18)
24%
45%
55%
76%
7,377 deals $512B
CVC
M&A
Source: Deloitte analysis based on data from Pitchbook
2
Non-tech companies sector technology assets

One of the major shifts in this space has been the acquisition of
technology assets by the non-tech sector. This has been an ongoing
trend since 2014 and, in 2018, nearly 55 percent of all technology
assets were sold to non-tech companies (see figure 2).
Figure 2. Disruptive technology assets – Tech buyers vs. Non-Tech buyers
60
55
% of deals
50
45
40
2013 2014 2015 2016 2017 2018
Tech buyers
Non-Tech buyers
Fig 2a. M&A deals done 2017-18 across key disruptive categories
$217B
$170B
2017 2018
$6B $14B $14B $16B $30B $41B $76B $166B

AI & ML MedTech Cybersecurity Fintech Internet Data & Biotech Digital
of Things Analytics & Social
3
Industry Convergence Future of Consumer includes deals at the convergence of Consumer

Disruptive M&A and CVC investments are facilitating cross Products, Technology, Retail, Financial Services and Media.
industry convergence at pace. None of the industries are insulated
against this mega-trend and disruptive technologies underpin Future of Finance includes deals at the convergence of Financial
most of such deals. Such convergence deals aim to consolidate Services, Telecom, Technology, Retail and Consumer Products.
select features from a variety of industries or products—
potentially from different sectors or categories—into a distinct, Future of Mobility includes deals at the convergence of
modular industry or a product. Automotive, Technology, Financial Services, Telecom and
Consumer Products.
Future of Health includes deals at the convergence of Health,
Technology, Telecom, Consumer Products and Financial Services Future of Media includes deals at the convergence of Media,
Telecom, Consumer and Technology.
Industry Convergence for M&A (2017–18) – Number of deals
Future of Health 491
Future of Consumer 467
Future of Media 310
Future of Finance 273
Future of Mobility 127
Industry Convergence CVC (2017–18) – Number of investments
Future of Health 606
Future of Consumer 297
Future of Finance 275
Future of Mobility 251
Future of Media 198
Future
of Energy 91
4
Small Gains, Big Wins | Disruptive M&A:
Brochure / report
Creating title goes
value through here |
Section
innovation-led growth
titleacquisitions
goes here
5
Unlocking new sources

of innovation-led growth
1 2 3
Unlocking new sources Identifying and Creating value
of innovation-led executing the and delivering the
growth right deal expected results
KEY QUESTIONS TO CONSIDER:

• Where is my industry headed in the next five to ten years?
• What are the forces that are likely to disrupt and reshape my industry?
• Does my leadership team have adequate understanding of these forces?
• How do we identify and assess the various inorganic growth options available to us?
• Should these options include investment, partnership, or acquisition components?
6
Disruptive M&A strategy: A series of choices Companies can augment their core capabilities by acquiring an
Strategy is the result of deliberate choices. An innovation-led growth innovative product or technology to enhance their existing market
strategy can be framed in terms of two distinct choices: Where to offerings—such as when companies acquire analytics capabilities
“play” and how to “win” (see figure 3 ). to enhance customer segmentation and targeting. Most of the
disruptive innovation investments tend to occur in this segment.
Leaders should consider a growth path and be realistic about the
internal capabilities that are required to deliver on their ambitions. Move into an adjacent segment: Innovation investments like these
Opportunity areas include: expand existing businesses into “new to the company” segments.
This includes product or service extensions aimed at capturing a new
•• Enhance the core: These are the capabilities that serve segment. Companies can exploit opportunities in adjacent segments
existing markets and customers and optimize existing by investing in a new product or capability. For example, when
offerings and operations. consumer brands manufacturers acquire platforms to directly sell to
consumers through subscription models.
Figure 3. Strategic choices
Where to play
Create new markets

and audiences
3
Transformational
Enter adjacent
markets and serve
new audiences
2
Adjacent
Serve existing
markets and
audiences
1
Core
Optimize existing Create extensions, Build new

How to win offerings and enhancements, businesses and
operations improvements structures
Source: Deloitte
7
•• Create a new transformative business: These types of In figure 4, we illustrate the disruptive strategic options to improve
investments are about transformational or breakthrough offerings the core, move into an adjacent market, and/or create an entirely
for markets that are yet to mature. These are often the most new business.
difficult, due to the risk and complexity of such investments.
When industries are on the cusp of fundamental disruption, the While developing an innovation-led growth strategy, companies
incumbents often make transformational investments. For example, should consider both short-term and long-term aspirations,
automotive companies have been making significant investments which may entail investment strategies across all three ambition
in AI technologies to progress autonomous vehicles and systems. levels. Disruptive M&A should help companies build a portfolio of
They are doing so to keep pace with fundamental disruption to their investment opportunities—including CVC, collaboration structures,
industry brought about by technology companies. alliances, and M&A—all to help companies unlock innovation-led
growth and transform the business.
Figure 4. Disruptive M&A strategy
Enhance Move into an Create a new

the core adjacent market transformative business
Acquire a Acquire a Acquire Disrupt the Convergence Become

new product new capability the disruptor adjacent market opportunity the disruptor
Buy a business Acquire new Buy a new business Buy a business that Buy a business Buy a disruptive
that enhances your capabilities such as that is disrupting the will give you entry that allows you to business that could, in
product offering analytics, digital, etc., market but is not yet into an established take advantage of the future, transform
that will significantly at scale adjacency or the convergence your industry and you
enhance your core category opportunities across become the disruptor
business sectors
Source: Deloitte Disruptive M&A, Future of the Deal
8
Building the opportunity pipeline business environment. Against this backdrop, it is critical that
Once the Disruptive M&A growth strategy is clear, the next step is companies develop a core capability to monitor market shifts.
to build a sustainable opportunity pipeline. There are three building This capability can help leaders make informed decisions on where
blocks to this process: to play and take advantage of the changes around them.
•• Disruptive market sensing Companies should develop market-sensing capabilities that not
•• Ecosystem engagement only monitor shifts in disruptive technologies, but in consumer
behavior and the impact of cross-sector convergence on the future
•• Innovation hubs coverage of various industries (see figure 5). By monitoring and reacting to
these shifts, companies will be able to make more informed and
Disruptive market sensing as a core competency deliberate choices regarding where to play across core, adjacent,
Short- and long-term trends, driven by exponential rates of change and transformative investment opportunities.
in technological advancements, are constantly altering the global
Figure 5. Disruptive market sensing
“Technology” “Consumer behavior” “Convergence”

Technology shifts Consumer behavior shifts Convergence across sectors
Artificial IoT Robotics Peers over Access over Collaboration Future of Future of Future
Intelligence corporate ownership over consumer mobility of finance
competition
Digital Fintech Future of Future of

manufacturing health
Big
data
Increasing level of complexity
Content •• To understand the current and future •• To understand fundamental shifts in •• To understand forces that are altering
purpose technologies that are disrupting your consumer behavior that are disrupting your industries and accelerating cross-sector
company. customers’ engagement. convergence.
Signal •• News feeds, patent filings, technology blogs, •• News feeds, influencer blogs, competitor •• Traditional competitors, adjacent industry
source CIO office, etc. activities, startups, internal product, and activities, startups, futurist blogs,
sales divisions. conferences.
Content •• Focus on key technologies that are core to •• Focus on key consumer behavior shifts that •• Focus on investment activities of both
approach the business and those that are driving the are likely to define new business and operating traditional and nontraditional competitors.
change in the industry. models. Also monitor in adjacent sectors. •• Focus on understanding how adjacent
•• Data feeds can be automated, however •• In addition to external sources, inputs should industries are evolving and new business
insights need to be curated. be sought from internal product and sales models that are emerging as a result.
divisions. •• Data feeds and insights are subjective and
•• Some data feeds can be automated, while need to be highly curated.
insights would require curation.
Source: Deloitte Next Billion Dollar Idea report

9
Ecosystem engagement Companies need to link innovation initiatives with their

Innovation ecosystems are not just about startups. To tap the transformational objectives. These activities should be carefully
full potential, companies should have an active ecosystem considered for the specific advantages they bring and the level of
engagement program to identify potential relationships commitment required. This way, companies would be able to operate
with startups, technologists, futurists, universities, leading a range of activities as part of their investment portfolio, with each
venture capital firms, accelerators and incubators, government one serving a distinct purpose and providing clarity on the expected
representatives, and even other corporations. outcomes and resource commitment (Figure 6).
Figure 6. Ecosystem engagement
High
Co-development Disruptive M&A
Corporate venture
capital
Business commitment
Ecosystem orchestrator
Hackathon
Collaboration
Accelerator
Incubator
Low
Unknown Defined outcome Known
Source: Deloitte Disruptive M&A
10
Innovation hubs coverage

A crucial part of a company’s ecosystem engagement strategy
should be connectivity across the key innovation hubs for the sector,
because the majority of investments tend to be directed in these
hubs. These hubs include the United States (Silicon Valley and East
Coast), Israel, United Kingdom, Germany, France, Netherlands, China,
India, Japan, and Canada (Figure 7).
Figure 7. Global innovation M&A and investment hubs
Europe Deal values ($B)

50
$5bn
$3bn
US Deal values ($B) $35bn
200 $19bn
$34bn 0
2017 2018
$24bn
100 Asia Paciﬁc Deal values ($B)
$140bn 100
$114bn
0
$41bn
2017 2018 50
Israel Deal values ($B) $13bn $37bn

20 $16bn
$0.7bn 0
2017 2018
$17bn
$1.5bn
South America Deal values ($B) 0 $0.6bn
2017 2018
4.0
2.0
$1bn
$0.3bn $1bn
0.0 $0bn
2017 2018
CVC
M&A
UNITED STATES EUROPE ISRAEL SOUTH AMERICA ASIA

The US is the biggest In Europe, the UK is Israel is one of the Brazil attracted the Asia is emerging as
market for innovation the biggest market major innovation highest amount of M&A a powerhouse in
investments and, for innovation investment hotspots and CVC investments both M&A and CVC
unsurprisingly, the investments, largely and offers plenty of in South America, investments. India
majority of investments led by London. M&A targets. but the regional market and China lead the
are in Silicon Valley. Other major hubs is a small one. way. Other major hubs
Other hubs vying for include France (Paris), include Japan (Tokyo),
investments include Germany (Berlin), the Singapore, and
New York, Boston, Netherlands, and the Australia.
Seattle, Denver, and Nordics.
Houston.
11
Corporate venturing 2.0 •• Value investor: CVCs should differentiate themselves as value
Corporate venturing is no longer the sole provenance of the investors. A key focus should be developing a distinct investment
technology sector. Companies across sectors—including thesis by identifying specific areas of value that the company can
agriculture, health, industrials, automotive, and financial services— bring to startups. These need not be limited to collaboration; they
are doing it as well. Beyond financial returns, CVC should be can also include connections to new customers, procurement,
seen as part of an integrated approach to innovation, business supply chain, financial systems, and other benefits that only
transformation, and growth. It provides companies with valuable corporations can provide. This will allow companies to clearly
access to new technologies, business models, and talent—all differentiate their CVC strategy from the competition.
crucial to growth through innovation. •• Governance: CVC teams have a crucial role to play in building
trust and relationships with founders. Companies should aim to
Looking ahead, we expect to see the emergence of a corporate develop a governance model that enables them to make decisions
venturing 2.0 phase, where corporate venturing become growth with the same sense of urgency that startups bring, while at the
and revenue engines in their own right (Figure 8). To successfully same time giving startups enough independence and cultural
implement corporate venturing 2.0, companies should consider the freedom to operate.
following factors:
•• Balanced portfolio: The CVC investment strategy should
•• Executive sponsorship: Strong C-level sponsorship is crucial have a balanced portfolio that covers core, adjacent, and
for long-term success, and CVC activities should be reported and transformational investments.
visible to the board. This will help ensure that CVC activities are
closely aligned with the company’s core growth strategy. •• Integrated approach to investment: Companies should take an
integrated approach to investment. CVC teams should function as
•• Internal connectivity: CVC investment activities should be the tip of the spear to better inform corporate development teams
relevant for internal product and service divisions. Therefore, about future trends and create target pipelines for the M&A teams
CVC teams should have a high degree of connectivity with these to make disruptive acquisitions.
divisions and a thorough understanding of the disruptive challenges
that impact them. In addition to making investments, CVC teams •• Measurement: CVCs should develop both financial and strategic
should have skilled resources to broker collaboration opportunities metrics to measure return on investment.
between startups and internal divisions. Often, CVC teams can lead
the company on a journey to embrace external collaboration.
Figure 8. Objectives of corporate venture capital
Financial objectives
Exploit the independent revenue and profit in the new
venture itself and participate in the upside that a high growth
firm earlier in its business life cycle generates
Seek monetization of investments through exits such
as initial public offerings (IPOs) or sales of ownership
Strategic objectives stakes to third parties
Gain access to technological advancements,
R&D, consumer insights, and new practices
Identify and exploit synergies between itself and the new
venture thereby obtaining growth within the parent firm
Source: Deloitte
12
Deloitte disruptive M&A framework •• Buy: Developing a dedicated disruptive M&A strategy to acquire
Disruptive M&A is not just about deals, but instead should be capabilities, products, and technologies that can unlock new
considered as a portfolio of investment opportunities—including sources of growth and revenue.
joint ventures, buyouts, and corporate venture investments. All of •• Collaborate: Collaborating with a range of ecosystem partners—
these help companies to unlock innovation-fueled growth. from startups to cross-sector corporations—to co-innovate and
develop new market offerings.
•• Invest: Developing corporate venturing as a core competency
to allow the organization to uncover, incubate, and invest in new It is important that these three options are on the table while
growth areas. evaluating any investment opportunity.
Figure 9. Deloitte disruptive M&A framework
Technology shifts Consumer behavior shifts Convergence across sectors
Artificial IoT Robotics Peers over Access over Future of Future of Future
Intelligence corporate ownership consumer mobility of finance
Digital Big Fintech Collaboration over Future of Future

data competition manufacturing of health
Strategic choices to capture

How to monitor these disruptive shifts Where is my industry headed in
and impact on my business? innovation-led growth the next 5 years?
Invest Buy Collaborate

Develop corporate venturing as a core Develop a dedicated M&A strategy to acquire Consider close collaboration with a range of
competency to allow the organization to capabilities, products, and technologies that ecosystem partners—including startups and
uncover, incubate, and invest in new growth can unlock new sources of growth and revenue. cross-sector corporates—to co-innovate and
opportunities. This could also lead to financial Cultural adoption will be a key driver for the develop new market offerings.
gains and sign-off opportunities. successful integration of such deals.
How to ensure such investments Should we integrate? What to integrate? When to Can we culturally adapt to collaboration
create value for the company? integrate? How much to integrate? as a business model?
13
UNLOCKING NEW SOURCES OF INNOVATION-LED GROWTH

Considerations to help drive success:
• Ensure clarity of vision and strong leadership that shows a willingness
to explore opportunities in core, adjacent, and transformative investments.
• Develop new capabilities such as corporate venturing, disruptive market
sensing, and ecosystem scouting.
• Adopt a portfolio-based approach to harnessing external innovation—
with equal focus on buy, invest, and collaboration models.
14
Executing the right deal
1 2 3

• How do we position ourselves to be an attractive acquirer to disruptors and innovators?
• How do we estimate fair valuation of a fast-growing technology company? Does the price justify value?
• Do we have the right internal skills to evaluate commercial risks and frontier technologies?
Are you the right buyer? •• Culture: Has the deal team assessed the potential cultural
Disruptive M&A investments are often linked to long-term impacts of an acquired business on the larger corporation?
transformation plays and companies need to consider if they are •• Incentives: Is the corporate parent willing to offer incentives that
indeed ready for such deals. It starts with the question—are you the may be higher than is typical, if these incentives help retain the
right buyer? While evaluating an organization’s readiness to engage target company’s management team?
in disruptive M&A, company leaders should consider the following:
•• Integration approach: Is the corporate parent willing to grant a
•• Vision: Is the parent company’s senior management clear about degree of operational autonomy to the target company during its
the vision and goals for specific transactions? Have they clearly first year as part of the larger organization? Does the corporate
communicated this to target acquisitions? parent need to set up an incubator or ventures division to manage
•• Leadership: Is there alignment and support among board the business during the transitional period?
members and C-suite executives? Is there an executive sponsor for
each potential deal?
•• Investment: Is company leadership willing to accept a different

ROI/investment level compared to standard levels? Should the
corporate parent prioritize growth over profitability? When should
leadership revisit the decision to continue investing?
15
Valuation: Reflecting risk and reward 3. Probability weight scenarios and simulate the potential
Estimating an early-stage target’s acquisition price requires analysis returns—Apply relevant valuation methodologies, often
and understanding of risk and potential returns. Cash flow and combinations of income and market-based approaches, to the
returns analysis incorporating upside and downside scenarios with commercial scenarios identified. Probability-weighted potential
relevant growth assumptions and future outcomes becomes vital to outcomes must reflect both upside opportunity and downside
arrive at a robust valuation (see figure 10). risk while at the same time a buyer must ensure that the
potential investment generates sufficient returns.
To derive an informed valuation, a potential buyer may want to
consider a three-step process that includes: Consideration of the above steps should enhance a buyer’s valuation
of the risk and reward of investment in disruptive businesses.
1. Assess economic opportunity—Identify and assess the
market opportunity for the target acquisition’s innovation and
value drivers using industry and market analyses.
2. Identify potential commercial success or failure
scenarios—Make informed forecasts considering the target’s
maturity level and value-creation opportunities in line with the
customer due diligence findings.
Figure 10. Valuation for disruptive assets
•• Funding requirement •• Revenue multiple •• EV/EBITDA or revenue •• DCF

Typical valuation
•• Founders equity •• Imputed profit margin curve multiple—listed and/or •• Dividends model/Gordon’s
approaches
requirement •• Development capital precedent transactions growth model

•• “Smart” money requirements •• Capital requirement for •• EV/EBITDA or revenue
expansion/acquisition multiple—listed and/or
•• Imputed margin of precedent transactions
established players
Value
•• Market opportunity •• Quality of clients •• Quality business plan •• Established governance

•• Quality & experience of •• Revenue growth rate demonstrating opportunity structure
Key drivers
management •• Technology platform •• Access to talent •• Strong cash conversion

of value
•• Track record capabilities •• High sustainable or growing •• Return on investment

•• Contracted revenues EBITDA/profit margins •• Market penetration & share
•• Scalability of platform •• Product development track •• Economies of scale
record •• M&A opportunities
Life cycle Startup/seed Pre-profit Profitable and Mature

rapidly growing
Source: Deloitte
16
Disruptive M&A due diligence •• Technology and platform: Is the acquired IT platform scalable?
Disruptive investments are complex and require specialized Can it be protected? Does the acquisition include the specialist
assessment of technology platform, new market opportunities, expertise to enable future development? Can the target’s platform
IP, cyber-risk, and others. In addition, disruptive assets often be integrated into the acquirer’s platform? To what degree can the
require significant investment before the buyer can realize the full platform be monetized? (see figure 11)
commercial potential. Therefore, the diligence process needs to •• Regulatory: Are there potential deal-breaking regulatory hurdles
be thorough and consider a wide range of factors. Over and above that need to be overcome?
the obvious financial due diligence, the following also needs to be
considered during the due diligence process: •• Tax and legal requirements: Does the target have strong and
sufficient patents and intellectual property? Are the value drivers
•• Commercial: What is the market size and market potential for aligned with the legal entity structure? Are there opportunities to
the target’s product/service? Is the target company’s growth gain significant tax synergies?
sustainable? How will they use further investment in growth areas?
Disruptive technology companies are centered around software
•• People: Is the current leadership team the right one to scale products and platforms. Ascertaining the growth potential and
the business? Is the target’s culture compatible with the buyer’s? associated risks involves deconstructing the core offering through a
What performance management system should be used to thorough analysis of four distinct dimensions.
motivate key employees?
Figure 11. Technology and Platform diligence considerations
1. PRODUCT 2. CORE TECHNOLOGY

Key functionalities Software Development Cyber Security
What is the maturity of How well are the software

the product compared to products documented?
competitors and alternatives?
Software Distribution
Is there a risk of product
obsolesce and can their core How are Operational resources
offering get disrupted? embedded in the development
life cycle?
Core
IP considerations
IT Architecture Product Technology
What is the IP? Who owns it?
what is the level of patent Is the technology architecture
protection? scalable? And what would be
the costs?
Projects and initiatives
Platform Integration
What is the level of dependency
Can the existing platform or
on 3rd party suppliers?
technology be integrated with the
How do the inflight projects buyer’s IT systems? What are the
relate to the products roadmap? pros and cons? What are the risks
and potential costs involved?
3. TALENT
People 4. CYBER SECURITY
What are the key competencies, What cyber security standards

skills and dependencies? are embedded in the
development process?
Performance Are penetration testing Talent
What are the key performance processes and practices
indicators telling us? How do you integrated into a software
monitor customer satisfaction? development life cycle
Source: Deloitte
17
Negotiating with the founders Frequent and detailed communication between the buyer and seller
Disruptive M&A deals often involve negotiation with the founding during the negotiating process is essential to ensure the right areas
team, who have an entrepreneurial mind-set. They may come to are targeted—and to demonstrate how the long-term growth vision
expect speedy decision-making, flexible processes, and specific deal of the business will be delivered in a way that supports the seller’s
terms. Often these are incompatible with the typical M&A playbook growth vision for the business.
adopted by large corporates.
The buyer should also share an initial view of the type/extent of
Identifying and resolving differences between the buyer and the integration that will be applied and the expected benefits to be
seller can be facilitated by using a “balanced scorecard” approach delivered. This, in turn, will impact the level of autonomy that the
that scores the transaction across a set of key parameters and target will enjoy. Autonomy and corporate culture are often critical
plots each others positions (see figure 12). This enables the buyer factors in an owner’s decision to proceed with a transaction, as is the
to address gaps and seek to either close them or improve other owner’s level of decision-making, career path, and level of influence
components of the proposal to compensate. within the new corporate structure.
Figure 12. Illustrative buyer and seller negotiation

“balanced scorecard”
Priorities during negotiation Buyer’s view (illustrative) Seller’s view (illustrative)
Strategic rationale
Does the deal meet my long-term vision?
Deal terms
Is the valuation reflective of true potential?
Operational control
Is there sufficient operational autonomy for acquired company to achieve its targets?
Talent
Will talent be adequately incentivized to continue delivering value post deal?
Culture
Will the target’s culture of innovation be allowed to remain?
Investment level
Is there willingness to make continued investment to grow the acquired company?
High Medium
18
EXECUTING THE RIGHT DEAL

• Ensuring strong support from leadership and various internal departments.
This is crucial because such disruptive M&A deals require significant all-round
efforts to make them a success.
• Do not underestimate the additional investments required to transform
these disruptive acquisitions and realize their full potential
• Disruptive M&A diligence is complex and requires a range of additional
considerations such as technology diligence, IP diligence, and others.
• Deals of this nature often break down during negotiation phase; to avoid, focus
on building a relationship with the founders and adopt a “balanced scorecard”
approach to identify and resolve differences.
19
Creating value and delivering

on the expected returns
1 2 3

• How to create long-term value from such deals?
• Should such acquisitions be integrated or kept separate?
• How to retain and foster incoming talent?
• How to culturally adapt and prevent corporate “antibodies”
from destroying the value potential of these deals?
Disruptive M&A integration process in an unconventional manner. And the integration and value
Disruptive acquisitions turn the integration process on its head. creation approach still needs to be carefully planned and implemented.
This is because disruptive acquisitions are not just about acquiring
products or technologies, they are about acquiring ideas and The acquirer should determine the minimum degree of integration
talent. Often the deal rationale is driven by the promise of revenue in year one that is required to establish financial control and
synergies, which are typically more difficult to capture than governance while effectively continuing to operate the business it
cost synergies. So, the integration question is no longer “how to just acquired. Differences in culture, process maturity, incentives,
integrate?” but instead becomes “how much to integrate?” or “should and the attitude toward innovation mean that the corporate parent
you keep it separate?” is often not ready to fully integrate the acquired business into
existing structures and still retain staff and preserve value.
Tackling these questions is equally complex because the corporate
parent still needs to drive value despite approaching the integration
20
Disruptive M&A integration—planning and priorities ranging from traditional integration to disruptive ones. Disruptive
Disruptive integration planning needs to be considered well before M&A deals are typically either extensions into adjacencies or
day one and the questions need to be reframed as: explorations into new categories and markets. The higher the
degree of commonality between the acquirer and target—in terms
•• Which integration activities will drive value and ought to be prioritized? of products and services, innovative culture, size in terms of revenue
•• How ready is the parent to undertake effective integration and and number of people, market and brand positioning, and attitude
what investment is required to deliver growth and value? to risk—the sooner full integration should begin. The opposite is also
true. Therefore, the challenge is to determine how these elements
•• What can the parent learn from the target to transform itself and should be integrated and when they should be brought into
avoid being disrupted in the future? compliance with standard industry processes for a large corporate.
The integration priority matrix (see figure 13) outlines the

relationships between deal type and type/degree of integration,
Figure 13. Integration priority matrix

Proportional
Consolidation Transformation Diversification

•• Value creation rationale: Economies of •• Value creation rationale: Redefining the •• Value creation rationale: Portfolio
scale, greater depth of capability business/the industry; revenue growth diversification
Relative Size of Entities
•• Spirit: Comprehensive engagement; seek •• Spirit: Collegial; focus on protecting and •• Spirit: Nonintrusive; aim to largely
to leverage the “best of both” leveraging strategy-enabling capabilities preserve target as stand-alone asset
Takeover Extension Exploration

Disproportional
•• Value creation rationale: Cost and asset •• Value creation rationale: Revenue •• Value creation rationale: Position
synergies and operational improvement growth; economies of scope & scale acquirer for emerging opportunity
•• Spirit: Focused and efficient; smaller •• Spirit: Paternalistic; focus on bringing •• Spirit: Supportive; focus on talent
entity absorbed into existing organization, additional products/markets into the fold retention, and business/capability building
processes, and systems
High Product/Service/Market commonality Low
Source: Deloitte
21
When considering the disruptive integration strategy, the acquirer Cultural considerations
should consider whether there is alignment with the target on the By undertaking a disruptive acquisition—whether it is a defensive
following aspects: move or to gain competitive advantage—management is signaling
•• Strategic blueprint: Where does the business expect to be in two change in the market. But they also need to signal change within
to five years, and what will the acquirer actively support vs. leave as the business.
autonomous during this period?
CEO and board commitment will be required to effectively implement
•• Degree of operational control/integration: What degree of the required changes and enable the acquirer to both support the
operational autonomy and decision-making will be given to the target’s growth and become a more innovative and nimble business
target’s founders once acquired? The founders will be used to in the process.
decision-making autonomy and will view quick decision-making as
a key component of their success to date. Determining the degree A major consideration for acquirers is the willingness to tolerate
of operational autonomy with aligned incentives will, therefore, be different cultural norms within the business to retain the innovative
key to both management retention and delivering the right growth spark that led to the success of the target.
strategy. Strong senior executive sponsorship will be required to
see it through. Commitment to retain the innovation culture within the target is
•• Talent and culture: What incentives and measures will be put key, while also assessing which aspects of the buyer’s culture will
in place to retain the founders and key staff, and how should be brought to bear over time. The target’s agile culture will typically
cultural differences be addressed? Early decisions are required feature autonomous, empowered, and loosely coupled teams that
on the type of incentives that will be offered to retain and are willing to address ambiguity, change, and risk to drive expansion
motivate key staff members of the target. Of critical importance and innovation. The acquirer, therefore, needs to balance the degree
is the incentives package that will effectively motivate the target of cultural integration with how this would actually impact the growth
company’s founders and key staff to align their objectives to the agenda (see figure 14).
new corporate parent in a meaningful way.
•• Investment in product/service: What level of investment and

cross-sell support is required to deliver the predicted revenue
synergies for the deal? The acquirer may need to calibrate both the
expected rate of return and overall risk appetite in years one to two
to ensure the business is given sufficient license to both grow and
adapt simultaneously.
•• Operating model: What type of operating model design will best

deliver the benefits and what degree of control is required from
day one? For example, should finance and HR be fully integrated,
while customer-facing functions are left alone for year one? The
proposed operating model will need to be designed to support the
growth priorities of the business, while retaining sufficient control
and governance to enable management to track progress and
decide how to develop the business over time.
22
Figure 14. The building blocks for successful Delivering expected returns
cultural integration Implementing an effective synergy-tracking process will be key to
The building blocks for successful cultural integration both assessing if the returns have been realized and providing input
on whether “course correction” is needed during years one and two.
Make cultural Reward behaviors that

exemplify the culture
Lessons learned from disruptive deals that can help drive value include:
change stick
Utilize data analytics •• Don’t declare victory on day one. Follow through on the rationale
to identify KPIs and
regarding how and when to integrate and retain executive
measures of success
Align and sponsorship throughout year one at a minimum.
Measure Keep the momentum,
change is not a •• Track revenue synergy delivery and ensure regular interaction
one-off project
between the integration director and target management throughout
Realign systems to
Manage the ensure they reinforce
year one to enable course adjustments in terms of investment, degree
change process key behaviors of autonomy, and support from the rest of the business.
•• Learn from the target and adapt the business to take advantage of
Deal with the non
the target’s customer insights and intellectual property.
Build communications
negotiable bad news
messages
items early
•• Flex the risk appetite and associated investment approach in line
with the strategic deal rationale and be prepared for a longer
First focus on the few
critical events that return timeline.
Build a detailed have high impact
change plan •• Decide on the core cultural integration direction from day one and
Be open and honest
support the management team in the decision through the journey.
•• Minimize the set of key performance indicators (KPIs) to focus on

Ensure leadership
alignment and equip
key areas—including cross-sell revenues, product development
them to drive change Identify and keep the costs/R&D, staff retention, and customer revenues.
underlying strengths of
the existing cultures
Identify core cultural and Put in place detailed
set the guiding principles talent retention plans
Pro-actively engage with
the talent through focus
groups and interviews
Undertake cultural fit
assessment as part of diligence
23
Small Gains, Big Wins | Disruptive
DisruptiveM&A:
M&A:Creating
Creatingvalue
valuethrough
through
innovation-led
innovation-led
growth
growth
acquisitions
acquisitions
CREATING VALUE AND DELIVERING ON THE EXPECTED RETURNS

•• An understanding of the true degree and pace of integration that is required
to gain control and deliver benefits.
•• An understanding of what changes are required to the parent business to
support the growth of this disruptive acquisition.
•• Integration efforts should concentrate on revenue synergies, growth and
scalability, rather than just cost containment.
24
Authors
Iain Macmillan Sriram Prakash

Managing Partner Global Lead, M&A Insights
Global M&A and Transaction Services Global M&A Services
imacmillan@deloitte.co.uk sprakash@deloitte.co.uk
+44 (0)20 7007 2975 442073033155
Larry Hitchcock Paul Dunn

Principal Director
US M&A UK Financial Advisory
lhitchcock@deloitte.com padunn@deloitte.co.uk
3124862202 447799072487
Steve Maddox Shyam Ramdevkrishna

Senior Manager Manager
US M&A US M&A
smaddox@deloitte.com sramdevkrishna@deloitte.com
7036557035 5512081774
Acknowledgements
We would like to sincerely thank many colleagues across the globe for Kanika Vanvari, Sukeerth Thodimaladinna and Ankit Kumar Baranwal
their valuable expertise and contributions towards this paper: provided support for research and data analysis.
Sandeep Gill, Tal Chen, Anthony Reid and Scott Campbell for input Martha Koeppen provided the leadership for marketing, production
growth and eco-system; Daan Witteveen and Elise Lufting for input management and communication.
into Corporate Venturing; Cedric Vandenabeele, Flora Wan, and Linda
Lee for their input into diligence considerations; Asish Ramchandran, In the course of researching this paper we interviewed external
Tim Heberden and Mark Steele for IP and Technology considerations; experts like Professor Aswath Damodaran of NYU Stern who
Andy Robinson and Neil Goodman for input into Valuations, Brian was particularly gracious with his views on valuation of disruptive
Pinto for Tax considerations, Mirko Dier for input into post-deal technology companies. We also interviewed Heads of M&A and CVC
integration, Anna Samanta and Rajat Mathur for people and cultural at major global companies, all of whom provided their views on the
considerations. practical challenges and opportunities of disruptive innovation for
the corporate sector.
25
Endnotes
1. Deloitte analysis based on data from Pitchbook.
3. Ibid.
4. Deloitte analysis based on data from CBInsights.
26
Disruptive M&A Global Contacts
United States Netherlands

Orlando Setola Daan Witteveen
Principal Partner
US – Financial Advisory Netherlands – Financial Advisory
osetola@deloitte.com dwitteveen@deloitte.nl
Jonathan Ohm Mark Casey

Managing Director Partner
US – Financial Advisory Netherlands – Financial Advisory
johm@deloitte.com markcasey@deloitte.nl
Will Engelbrecht Israel

Principal Sigal Adania
US – M&A Consulting Partner
wiengelbrecht@deloitte.com Israel – Financial Advisory
sadania@deloitte.co.il
Brian Pinto
Partner Tal Chen
US – Tax Partner
bpinto@deloitte.com Israel – Financial Advisory
tchen@deloitte.co.il
United Kingdom
Sriram Prakash China
Director Michael Zheng Yu
UK – Financial Advisory Partner
sprakash@deloitte.co.uk China – M&A
micyu@deloitte.com.cn
Sandeep Gill
Partner Japan
UK – Financial Advisory
sandeepsgill@deloitte.co.uk Satoshi Yokota
Partner
Simon Brew Japan – Financial Advisory
Partner satoshi.yokota@tohmatsu.co.jp
UK – M&A Consulting
sbrew@deloitte.co.uk South East Asia
Soo-Earn Keoy
Andy Robinson Partner
Partner Singapore – Financial Advisory
UK – Valuations skeoy@deloitte.com
anrobinson@deloitte.co.uk
27
Australia Spain
Kat McMaster Jose Maria Grande
Partner Partner
Australia – Financial Advisory Spain – M&A Consulting
kmcmaster@deloitte.com.au jgrande@monitordeloitte.es
Canada Nordics
Flora Wan Tom Johannessen
Partner Partner
Canada – Financial Advisory Denmark – Financial Advisory
flwan@deloitte.ca tjohannessen@deloitte.dk
Switzerland Central Europe

Anna Samanta Alexander Zahariev
Partner Director
Switzerland – Financial Advisory Central Europe – Financial Advisory
ansamanta@deloitte.ch azahariev@deloittece.com
Germany
Mirko Dier
Partner
Germany – M&A Consulting
mdier@deloitte.de
France
Charles Bédier
Partner
France – Financial Advisory
cbedier@deloitte.fr
Italy
Rossella Lehnus
Director
Italy – Financial Advisory
rlehnus@deloitte.it
28
This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting,
business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute
for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your
business. Before making any decision or taking any action that may affect your business, you should consult a qualified
professional advisor.
Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.
About Deloitte
As used in this document, “Deloitte” means Deloitte & Touche LLP, which provides audit and risk advisory services; Deloitte
Consulting LLP, which provides strategy, operations, technology, systems, outsourcing and human capital consulting
services; Deloitte Tax LLP, which provides tax services; Deloitte Financial Advisory Services LLP, which provides forensic,
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Small Gains, Big Wins

Disruptive M&A: Creating value through

The rise of disruptive M&A 2

Unlocking new sources of innovation-led growth 5

Identifying and executing the right deal 15

Creating value and delivering on the expected returns 20

Disruptive innovation is high on many CEO agendas. The confluence

The advent of disruption is also blurring traditional sector

Deloitte analysis shows companies spent about $880 billion on

1. Unlocking new sources of innovation-led growth

The rise of disruptive M&A

Figure 1. Disruption in numbers

Global disruptive M&A and CVC activity (2017–18)

Deal volumes (2017–18) Deal values (2017–18)

7,377 deals $512B

Source: Deloitte analysis based on data from Pitchbook

Non-tech companies sector technology assets

Figure 2. Disruptive technology assets – Tech buyers vs. Non-Tech buyers

$6B $14B $14B $16B $30B $41B $76B $166B

Source: Deloitte analysis based on data from Pitchbook

Industry Convergence Future of Consumer includes deals at the convergence of Consumer

Industry Convergence for M&A (2017–18) – Number of deals

Future of Health 491

Future of Consumer 467

Future of Media 310

Future of Finance 273

Future of Mobility 127

Industry Convergence CVC (2017–18) – Number of investments

Future of Health 606

Future of Consumer 297

Future of Finance 275

Future of Mobility 251

Future of Media 198

Source: Deloitte analysis based on data from Pitchbook

Unlocking new sources

KEY QUESTIONS TO CONSIDER:

Figure 3. Strategic choices

Create new markets

Optimize existing Create extensions, Build new

Figure 4. Disruptive M&A strategy

Enhance Move into an Create a new

Acquire a Acquire a Acquire Disrupt the Convergence Become

Source: Deloitte Disruptive M&A, Future of the Deal

Figure 5. Disruptive market sensing

“Technology” “Consumer behavior” “Convergence”

Digital Fintech Future of Future of

Source: Deloitte Next Billion Dollar Idea report

Ecosystem engagement Companies need to link innovation initiatives with their

Figure 6. Ecosystem engagement

Co-development Disruptive M&A

Source: Deloitte Disruptive M&A

Innovation hubs coverage

Figure 7. Global innovation M&A and investment hubs

Europe Deal values ($B)

Israel Deal values ($B) $13bn $37bn

UNITED STATES EUROPE ISRAEL SOUTH AMERICA ASIA

Source: Deloitte Disruptive M&A, Future of the Deal