Eveline Baumeister spent two decades actively driving digital transformation at Siemens and Cisco, engaging with many global strategic partners and C-suite clients on the visions, strategic frameworks and implementation of proof-of-concepts for emerging digital technologies and business models. After moving across to Private Equity, she saw the challenges of demonstrating not only progress on these innovation activities which in some cases may still be in flight at the time of the exit, but also real financial returns to create buyer confidence and attract premium valuations.
Eveline is a Consultant with The Deal Team.
The relevance of digital continues to accelerate
Digital technologies innovation continues to increase at a rapid pace, causing market shifts and creating inflection points for many traditional businesses as well as creating new business models. Existing businesses have to swiftly adapt or may potentially face irrelevance as digital and digitally transformed players with highest customer focus and new digitally enabled business models capture market share. How should you prepare to capture this value creation for your business?
Digital transformation – or fuelled by the challenges of the Covid-19 pandemic, now being increasingly referred to as digital acceleration strategies – can be three-fold: (1) increasing productivity through automating your enterprise technology backbone, (2) fostering new and improved customer interaction through digital operations technologies, and (3) overarching in its most significant impact, enabling new value-driven digital business models. The Global Centre for Digital Business Transformation, a Cisco and International Institute for Management Development initiative, in their June 2017 publication Public Sector And The Digital Vortex, said digital technologies have the potential to be (1) enabling new business models, and (2) delivering customer-focused value in new ways.
Digitally enabled disruptive business models are being categorised to deliver three main types of customer value, namely cost value, experience value and platform value. Further, the best disruptors do not stop at delivering one source of value. They combine them, to maximise the value they can bring to customers and the threat they can impose on incumbents. Disruptive companies win because they prioritise customer value and are agile enough to occupy value vacancies.
Whilst digital native players are often assumed to design disruptive business models and “killer-apps” right from the start as they have no legacy operations, it can be more challenging for traditional players and incumbents to carefully select their digital acceleration strategies and track value creation directly attributable to implementation of those strategies. Further, unlike successful digital natives that are often associated with an attractive valuation positioning in the peer group chart, traditional players need to clearly demonstrate and articulate why they may be considered to breaking away from the traditional peer groups and make headway towards the disruptive digital natives, from a business and valuation point of view.
Transaction execution to best reflect digital acceleration progress
Your deal advisors should guide you in defining a compelling equity story, focusing on the core competitive strength of the business and the “reason to buy”. An equity story typically is expected to convey the company’s USPs in a small number of highlights and clear demonstration of KPIs. The key is to find a good balance and to centre on the overall strength of the business. Whilst digital acceleration can be a highly relevant value creation lever, it should not distract from the core unless it leads to a tangible value.
Capital markets advisors and investment banks will provide guidance on selection of an appropriate valuation peer group and evaluating the investment case positioning to other traditional peer groups. Proving the superiority of returns and strengths of a business model should be at the centre.
Our work as a Deal Captain to Management will often involve helping management to determine the most relevant KPIs which capture the hard work done by the company in active digital acceleration. Then making sure these are rigorously prepared, and finally helping to position these in a compelling presentation of the digital value creation. A successful positioning of the company’s digital performance can translate it into a digital arbitrage which may bring in new strategic buyers or investors who are willing to pay a premium acquisition price.
Both financial and meaningful non-financial KPIs are at the centre of articulating digital value creation
Inherently, the key to articulating clearly the contribution of digital value creation is to explain them through the impact on business fundamentals, such as revenue growth and productivity gains. The digital benefits are ideally visible in the achieved and projected financial statements, instead of as yet-to-be-proven strategies. It also implies that digital initiatives that cannot demonstrate clear contributions to business fundaments may, although still useful from an innovation perspective, be less relevant from a transaction execution perspective.
For businesses to be potentially recognized as “tech-enabled”, double-digit growth and substantial faster scaling opportunities beyond the traditional model are likely to be needed. Your capital markets and financial deal advisors should be able to provide you with the relevant insights and benchmarks specific to your specific sector, subsector and business model.
Growth and significant scaling opportunities, including those stemming from digital acceleration activities, should be underpinned in KPIs meaningful to the business, such as Revenues and EBITDA. Additionally, tailored business specific KPIs demonstrating the value to the core business may be beneficial to underpin successful digital value creation initiatives, e.g. Sales Productivity Increase, #Of Users and Annual User Growth, Revenues of New Services Created or, where applicable, perhaps percentage of revenues transitioned to a Recurring Revenues Model.
It is recommended to consult advisors early on as relevant KPIs should be established well before the deal or liquidation event and marketing process and demonstrated via a meaningful KPI trajectory.
Essential to present KPIs which are meaningful to the new investors consistently throughout the transaction documents – and beyond
The identified meaningful KPIs and trajectory shall be used consistently throughout the deal process documentation, such as for instance teaser, information memorandum and management presentations in case of an M&A transaction process or early look presentations, analyst presentations and investor presentations respectively in terms of an intended IPO process.
If digitalisation is a specific use of proceeds, the presentation documents will need to be convincing on how this investment in digital acceleration will raise growth and/or productivity to generate investor returns.
For an IPO, the Deal Captain and Management also should discuss with their advisors which KPIs are going to be Prospectus valid, and further, may be relevant to serve ongoing and future information requirements.
To conclude, companies can most easily realise the premium valuation of their digital transformation when this acceleration is already visible in the financial KPIs and can be projected forward. In all cases, showing non-financial KPIs specific to the company, demonstrating measurable digital acceleration progress, can help increase visibility and show that the company’s digital acceleration efforts are on a successful path. All these KPIs must be meaningful to the new investors for them to understand the digital value creation realised, and how it has helped to shape competitive positioning. Having such a clear investor return focus in mind, may even help to guide the company on selecting the most relevant digital acceleration initiatives right from the outset.
Eveline Baumeister is a Consultant with The Deal Team. The opinions in this article are the author’s own.
The Deal Team is passionate about transaction execution- because management should be running their business, not the deal. We are the first professional transaction manager for M&A and capital markets. We deliver speed, agility, and transparency of execution processes to maximise your competitive tension, your control over transaction variables, and your management teams’ capacity to focus on business performance. We do this by providing a dedicated Deal Captain to work shoulder-to-shoulder with management teams, delivering execution excellence onsite throughout a transaction.
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