Traditional Asian businesses must start selectively buying small ‘digital disruptor’ technology companies if they are to avoid losing market share – either to these firms or to rivals that acquire their services, predicts Accenture Strategy.
“We have seen a lot of attention around the mega-deals in the world, which are used to gain scale and expand production, but these deals do not allow clients to look at the impact of digital disruption,” Accenture Strategy's Bruce Delteil told FinanceAsia.
A lot of attention around digital disruption has focused upon financial technology, as new companies use online interaction to compete with traditional banking and consumer finance.
However, digital companies are poised to upset many more industries outside of finance, said Delteil, the global consulting firm's managing director for corporate strategy and M&A for Asia-Pacific.
“All sectors will be impacted,” he said. “No one sector stands out.”
Accenture Strategy predicts that companies need to conduct small-scale acquisitions to build e-commerce and digital business capabilities that complement more traditional business lines if they are to avoid losing market share.
“A key sign you need to change is if the economy you’re operating in is still growing but your sales are falling,” added David Mann, Accenture Strategy’s managing director for Australia and New Zealand.
He noted that Australian companies are probably the most advanced in the wider Asia-Pacific region in terms of actively seeking out and attempting to add digital acquisitions and solutions to traditional businesses.
Finding the right digital companies to buy will pose its own problems -- both for the companies seeking to acquire and their financial advisers.
“When companies say ‘I believe I will not be in business five years from now unless I buy small-scale digital companies’, the question then becomes: how do you find these companies, how do you value them, and once you acquire them do you leave them alone, should you integrate them and how do you learn from them?” Delteil said.
Answering these questions will be one of the key strategic difficulties facing company advisers such as investment banks, accountants, consultants and law firms, he added.
One challenge will be the scale of any mergers and acquisitions. Buying digital start-ups will be far less capital-intensive. But it will also be harder to identify them. What's more, traditional ways of measuring performance -- such as revenue, profits, turnover, past history -- will be largely meaningless.
“There will be M&A but it will be a lot smaller,” Mann said. “You can’t use old routines for the new world, so you will have to refocus part of what you do, and even use technology and digitalise it. It will be an interesting evolution for advisers.”
As a result, big companies may have to operate more like venture capitalists, seeding multiple companies with investments.
China has seen a great deal of digital disruption as companies like Alibaba, Tencent, Ant Financial, and Baidu have forced change upon sectors used to traditional product ordering and delivery. These have more recently started to raise capital to fund more consolidation in the digital industry.
Alibaba, for instance, bought the stake in New York-listed Chinese video hosting company Youku Tudou that it didn’t already own, while tech startups Meituan and Dianping merged in October to create a viable online-to-offline competitor to compete with the likes of internet search company Baidu.
Meanwhile Ant Financial, the financial services arm of Alibaba, is heading towards an IPO that promises to be very popular and could give it the means to compete more directly with China’s traditional banks.
Delteil said China offered international companies some interesting lessons, as several companies there have leapfrogged the technology interaction employed by rivals in other nations. For example, Chinese consumers are increasingly becoming comfortable with mobile payments due to the likes of Alipay, Alibaba’s mobile payments division, while US customers continue to favour credit cards.
A key issue facing may of Asia’s larger companies is that they are often either family-owned or state-dominated. These sort of businesses struggle to acquire and integrate small, nimble companies with different cultures, without destroying whatever value they offer.
Yet these large Asian companies must learn to embrace such digital acquisitions and then learn from them if they are to avoid seeing their customer base slowly wither away, Accenture Strategy believes.
Digital disruption could potentially have a longer-term impact on M&A too, the two executives predicted.
“Some companies will understand this [impact of digital services and new means of operating] on their businesses faster than others,” said Delteil. “What will happen to those that are slow to do so? Will it create a further round of consolidation [as the companies slowest to adapt lose market share and are consumed]?”