Accelerate your transformation with M&A

Industrial continues to court digital upstarts to help reinvent products and services. But keep an eye on these potential hazards.

When opposites attract, sparks can fly. Such is the case when a legacy industrial company acquires a tech upstart. But whether those sparks ignite new growth or cause everything both companies hold dear to go boom depends on the integration plan.

Industrial has been on a shopping spree lately, aggressively pursuing smaller companies that allow them to rapidly expand their digital capabilities. In fact, industrial market companies have been acquiring technology businesses at a greater rate than any other sector for five years now as they seek to maintain their competitive edge—and protect their market share.

These deals are critical to the future of manufacturing because many industrial companies struggle to digitize on their own. These transactions are also complex and challenging, requiring companies to integrate organizations with very different technologies, cultures, talent, and ways of working.

So, how can analog companies ensure they don’t smother their shiny new tech acquisition in the merger process? Our new report, “From Industrial to Digital with M&A,” details the five ways that leading industrial market players are getting tech deals right. Here’s a peek at their playbook:

Where opportunity meets complexity

Despite a recent cooldown in M&A activity, competition for tech acquisitions continues to increase, as high-quality targets become scarcer. For industrial market companies, the challenge of buying a tech business with a higher multiple is justifying to shareholders how the firm plans to capture synergies, unlock value, and increase returns.

Given these conditions, the stakes to successfully acquire, integrate, and derive sustained value from a technology company have never been greater. The key to unlocking the promise of these transactions is to maintain a careful balance between selective integration and holistic value capture: implementing the parts that work well together, while also maximizing the overall value of the merged entity—and, of course, keeping a close eye on how effectively the teams are collaborating.

Here are the common challenges acquirers often trip over and how successful industrial market companies sidestep them.

Tech acquisitions are at high risk of being suffocated by traditional playbooks. A common mistake is forcing uniform integration of people, processes, and systems by eliminating redundancies through a like-for-like exercise.

Sidestep it: Enforce strict prioritization of workstreams based on expected value, not on uniformity or perceived fairness. Work backward from the end state to pinpoint with precision which areas need to be integrated and to what degree.

If the tech acquired is consumer-facing, then existing customers may become skeptical that the larger entity will continue to innovate and stay nimble.

Sidestep it: Successful integrators anticipate this resistance and proactively engage customers by emphasizing the new offering’s value rather than its features. Integration teams must develop pricing models that are representative of a cohesive offering, seamlessly blending the legacy industry product and its newly added digital sibling.

As revenue synergies become more important, deal teams are at risk of setting stretch targets without sufficient pressure-testing from the regional business units and commercial leads who inherit accountability.

Sidestep it: In a recent KPMG study, industrial executives said the heightened focus on synergies makes unlocking deal value their most complex challenge. Capturing the incremental value often starts by integrating the acquired technology into existing products, not offering it as a disparate add-on.

Tech companies are known for having less bureaucracy, more innovation, and quicker decision-making instilled in their culture. It’s often part of their appeal. But many acquirers—larger, more structured, more risk-averse—take culture for granted.

Sidestep it: To promote cultural alignment and continued innovation as a single large enterprise, assess culture to understand where to assimilate and where to incubate. One tactic that works: Engage cultural leaders on both sides of the new organization and position them to lead integration efforts. This will promote engagement across the enterprise.

Tech companies tend to be more generous with lofty titles and buckets of equity than their industrial counterparts. Furthermore, equity awards tend to extend deeper into the organization. As a result, matching compensation becomes a delicate exercise, but it can be make-or-break for retention.

Sidestep it: Engineers and salespeople are generally the greatest flight risks. And replacing them would affect the growth prospects of the target business and require significant investment. Address friction points early. For engineers, it’s often equity compensation, seniority of title, and flexibility. For salespeople, it’s realignment of customers, cross-training, and adjusting sales goals tied to compensation.

Making it work

Mergers and acquisitions are complex by their very nature with the intricacies of all the related “details” involved. And working through that complexity can be especially challenging when companies with very different backgrounds, capabilities, and cultures tie the knot.

Getting it right will require extra time and attention from corporate planners on both sides, and not just at the deal stage. Given the high stakes—and heightened attention from stakeholders—many companies may benefit from bringing in an outside partner to help with strategy, diligence, and the myriad aspects of integration planning and execution.

Accelerate Transformation Through Acquisition
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Contact the authors

Matthew Dintelman

Matthew Dintelman

Managing Director, Deal Advisory and Strategy, KPMG US

+1 312-320-0014
Alex Aschenbroich

Alex Aschenbroich

Director, Deal Advisory & Strategy, KPMG US

+1 404-353-0547