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Elkstone Venture Monthly Bulletin

Disruptors at the Gate: Strategic M&A for Managing Disruptive Innovation

This month’s article, or more appropriately, tome comes from the Citi Global Perspectives & Solutions series. The article is a weighty read discussing the theme of technological disruption and how it is fundamentally transforming the global economy.  Citi GPS regularly produces a series of broad thematic pieces that look at various sectors using the resources of over 200 investment analysts employed across the group. While some of the articles are sector specific eg. the Future of Banking, a lot are more general referring to innovation trends that are well worth reading for anybody interested in the venture space. The other good thing is that all this information is freely available to the public at large!

Managing Disruptive Innovation Key Points

Technology companies are accelerating their expansion across traditional sector boundaries and creating unprecedented challenges to once unrivalled competitive positions and market share. As organic innovation through R&D alone is often proving insufficient to respond to these shifts in the competitive landscape, companies — especially those outside of the technology sector — are increasingly responding via M&A. A number of key considerations can help guide executives as they adapt their M&A strategies to prioritize the acquisition of new digital capabilities and expertise:

  • Cross-sector acquisitions of technology targets are increasingly common today, despite their higher valuations which can potentially well exceed that of the acquirer
  • Investors have responded favorably to disruption-motivated M&A, with acquirers experiencing an excess return of 7.3% over a one-year horizon post announcement
  • From a value creation perspective, disruptive deals have the potential to far outpace the share price performance for buyers across both other types of deals and alternative means of capital deployment
  • A proactive approach to disruptive M&A often yields the best outcomes, with such buyers experiencing one-year excess returns of 5.5%, growing to 18.0% when the deal value exceeded 10% of the acquirer’s market capitalization
  • Acquiring firms at the right valuations remains an important consideration in the context of disruptive M&A, but investors appear more accepting when buyers pay up for a disruptive target
  • Appropriate investor communication can generate significant shareholder value, especially across proactive transactions, which can be more uncertain and unconventional in their long-term strategic objectives

As the pace of innovation both accelerates and spreads across sectors, addressing the impacts of technological disruption should be one of the foremost considerations in designing an appropriate M&A strategy. While these transactions can entail many unique risks in the short term which will need to be managed, they often have the potential to create significant shareholder value over longer horizon. Companies that can successfully evaluate and execute on these diverse M&A strategies will have the greatest advantage in navigating the current wave of technological disruption and generating sustainable value for their shareholders.


Source: CitiGroup, April 2018. The content above is an extract from the full report. Click here to read this report in full.