Making money when every deal is a tech deal. Part II: Claims of immunity


technology, software, SaaS. private equity, merger, m&a
Scott B. Meyer, owner and principal consultant at Glenview James LLC. Photo courtesy of Meyer.

By Scott B. Meyer, Glenview James LLC

It’s easy to look at things in black and white. Tech deal. Not tech deal. The reality is that today every deal is a tech deal. Even old-school industries are facing fundamental technology changes. If they don’t adapt, they’ll be left behind.

This is part two of a four-part series on how to get digital right in the diligence process. In part one we looked at how to make sense of tech lingo, or the blizzard of buzzwords during diligence. Here we’re looking at claims of immunity, companies’ insistence that tech changes don’t affect them.

Blanket immunity claims

The first thing to watch out for in due diligence is management saying something like, “Our market is different. Our buyers don’t buy that way. We’re largely immune to these tech-driven shifts.” If you hear that, push back – hard. Ask for an explanation and if nothing’s forthcoming, that should give you pause.

Sales-mix change

In another scenario, a CEO might say something like, “We have strong top-line growth and margin expansion, so we’re safe.” But look more closely at the product or sales-channel level. If one product has seen steep declines while others have been growing fast, the company could be at the start of a very unpleasant disruption.

CEOs who aren’t embracing the cold hard facts here will say things like: “Well, that category of buyers is under a lot of pressure in their own business. Their spend went out of the market, not to digital solutions.” If you can’t correlate the decline in spend with the health of the overall market, then the immunity claim is probably false.

Channel-mix change

Finally, look out for scenarios where physical sales seem shaky while online sales are growing. The company better have a plan, not an excuse. You don’t want to hear anything like, “Oh, that was just a blip because Easter was a week earlier this year”; or, “We had a five-week month the same month last year”; or, “We had competitor who was going bankrupt and slashed prices to stay afloat.”

In reality, if the company is built on offline retail channels or direct enterprise sales, there better be a plan to embrace the direct selling power of digital.

How do you solve for these different types of immunity claims? The solution can take a few forms.

One option is to bring in a new CEO who gets digital. I’ve also seen some firms pull in an operating partner or consultant as interim head, just to get the management team focused as soon as possible after closing.

The second option is develop a plan for digital transformation during diligence and, again, get it going right after closing.

This is particularly hard for take-privates. Public company execs are conditioned to hitting EPS each quarter or else. The multiquarter or multiyear investment to embrace digital that was a no-go as a public company is a must-do once private. The management team may know what to do. They need the investment from the sponsor and the alignment incentives to assume them.

Once you have a plan in place, it’s time to get to the really hard work of digital transformation. I’ll talk about the Digital Transformation Conundrum in my next post.

Scott B. Meyer is owner and principal consultant at Glenview James LLC. His practice centers on digital due diligence and digital transformation work for sponsors and portfolio companies. Reach him at scott@glenviewjames.com and at @scottmeyer.