• September 26, 2016

When Two Become One: The Merger Movement

The flurry of factors driving a spike in enterprise M&A activity.

When Marc Lore founded Jet.com in 2014, the renowned retail executive wasn’t shy about his vision for the business.

As Lore explained in a 2015 interview, the company wasn’t built to topple Amazon or take down Wal-Mart Stores Inc.—at least not directly and not in the short term. Instead, Lore saw Jet as a platform that would enable other merchant partners to compete more efficiently against those retail giants.

Two years after the founding, Lore’s vision seems to have played out as planned. In early August, the company was acquired by Wal-Mart for $3.3 billion—the largest-ever acquisition for a U.S.-based e-commerce start-up.

Why Wal-Mart (and Others) Are Opening Their Checkbooks

It’s unlikely that Wal-Mart cared much about whether Jet viewed itself as a direct Wal-Mart competitor. Instead, what mattered to Wal-Mart was that Jet existed at all. If the platform continued growing at its current rate, those gains—whether they benefited Jet or its merchant partners more—would have ultimately come at Wal-Mart’s expense.

So, like many large enterprises, Wal-Mart made a decision: Buy now before the risk of waiting becomes too great.

We’ve seen this M&A strategy a lot recently, most notably with Microsoft’s $26.2 billion purchase of LinkedIn, Marriott’s upcoming merger with Starwood, NTT Data’s acquisition of Dell Services, and HPE’s announced spin-merger of its Enterprise Services business with CSC. In fact, according to UBS Group AG (via Bloomberg), enterprise software M&A activity is off to its best start in five years in terms of deal volume.

What’s driving this activity? For some, M&A presents a clear opportunity for earnings gains. But for many enterprise organizations, it has just as much to do with disruption—both the potential to avoid it (see: Wal-Mart’s purchase of Jet) and opportunities to enable it (see: Dell’s massive $67 billion acquisition of EMC).

The Right Way to Approach Enterprise M&A

There’s just one problem with M&A: If not done right, it can be a risky proposition. Correctly matching candidates to the strategic purpose of the deal is priority one.

  • Cybersecurity due diligence: Failing to perform an adequate evaluation of a potential acquisition target’s infrastructure security can open the acquirer to cyber risks that undermine its health and expose it to potentially disastrous regulatory issues.
  • Post-deal integration: Every business has its own business model, technology, and corporate culture. Facilitating a smooth integration of those can be tricky. One report from Deloitte found that post-deal integration remains the greatest challenge in M&A success.

Of course, the risk of inaction can be just as severe. This is something that clearly factored into the decisions of Wal-Mart, Marriott, and other recent enterprise acquirers. Still, the desire to avoid disruption can’t trump the need to give M&A the diligence and strategic planning it demands. 

 

Like this story? Learn more about the importance of communication in the M&A process.