Mergers and acquisitions (M&As) can play a key role in helping engineering organizations to transform digitally. Buying a business with great talent and technology can be a shortcut to reaping the benefits of digital transformation. But while effective integration can lead to big business advantages, M&As also bring new technological complexities.
What’s the link between M&As and digital transformation?
M&As are not a necessary part of digital transformation, but they can create fresh opportunities to explore new technologies and processes. Acquiring a new organization—with all its technology, talent and other resources—can provide the capability and impetus for a digital transformation program, such as moving to the cloud, embracing data-led change, or offering new electronic channels to market.
Are M&As a shortcut to digitalization?
The good news is yes, mergers can be a way to jumpstart digital transformation. In a 2020 article on maximizing digital value from M&A deals, consultant McKinsey says integrations create a milestone event that gives managers the chance to make significant changes to foundational processes and operating models. That’s good news for engineering executives who feel their company has been slow to exploit digital and data.
The bad news is that any merger or acquisition involves challenging work. Bringing people together in a newly combined entity requires a consistent program of steady change. Yet for those who succeed, the potential rewards are significant. McKinsey says executives who steer their companies through choppy, post-merger waters have a unique opportunity to launch digital transformation initiatives.
The key to success is building momentum. During the M&A process, your people will become used to the idea of incremental change. Managers should look to pique the interest of stakeholders and team members by finding ways to pursue digital transformation as a benefit of the integration process.
Of course, bringing businesses and systems together is by no means easy. An increase in the data your company holds, for example, can create big problems for executives looking for a quick and effective integration. In a 2019 press release, Gartner said the average time to finalize a merger or acquisition had risen to 38 days, which is 31 percent longer than in 2010. The analyst said an increase in digitally driven deals is one of the key trends contributing to the slowdown.
However, engineering executives must deal with the data management challenges they encounter. Engineering firms, like all other companies, need to ensure data is trustworthy and secure. Creating a single source of truth for enterprise data is crucial for governance purposes, but it’s also the foundation for effective digital transformation efforts.
How can a business use M&As to jumpstart digital transformation?
Despite slowing economic activity during the first half of 2023, consultant PwC suggests in an industry outlook for the engineering and construction sector that the medium-term outlook for M&A activity is characterized by cautious optimism. The consultant says underlying confidence is being fueled by private equity capital and cash-rich corporates looking for their next investment.
So, how might engineering firms use M&As to kickstart digital transformation processes? One way is modernization. As part of the integration process, an acquiring company will review its core IT systems and infrastructures and those of the firm it’s buying. The review might highlight how the company it’s acquiring is a heavy user of flexible and scalable IT platforms, such as those based on the cloud. The newly integrated company can use this cloud platform to move away from legacy applications.
Innovation can be another way to use a merger to quicken the pace of digital transformation. Blue-chip engineering firms are at threat of being disrupted by faster-moving startups that exploit digitalization and data to support new business models. Acquiring a firm with a foothold in an emerging area such as the Internet of Things, digital twins and artificial intelligence is one way to fend off digital disruption.
Other motivations for using M&A activity as a route to digital transformation include adding fresh talent to your business and expanding into new geographical markets.
Are there examples of engineering firms using M&As to kickstart digital transformation?
From access to innovation to talent acquisition and onto regional expansion, here are some examples of M&A activity supporting digitization efforts:
- Automation and energy management specialist Schneider Electric recently acquired industrial software company AVEVA. A press release announcing the deal said employees of the two companies will deliver an integrated approach to digital transformation, while reducing energy, carbon and resource intensity.
- German intralogistics provider Jungheinrich AG acquired Arculus, a developer of modular production AI software for factories and warehouses, in 2021. Jungheinrich believed the addition of automation to the intralogistics process would give its customer new levels of flexibility and control. In 2023, the company attributed record revenues to “very strong growth in the automated systems business.”
Is it difficult to use M&A to stimulate digital transformation?
While M&A activity can be used to inspire new interest in digital tools and processes, it must be recognized that bringing two or more companies together is far from straightforward. Mergers and acquisitions bring new complexities. Engineering firms that acquire other organizations often end up with multiple business units in disparate locations, with a range of people using a plethora of technology systems.
Bringing these systems together is a tricky challenge. While M&As can be the impetus for digital transformation, IT industry experts warn that merging disparate applications and data is a top obstacle in any merger or acquisition because each company often has its own mission-critical applications and legacy technology platforms.
How do companies use digital transformation to overcome M&A complexities?
It’s important to understand that M&A activity isn’t just a route to digital transformation. Sometimes CIOs and their executive colleagues use digitalization to help integrate disparate, post-merger organizations.
Take the example of engineering and construction specialist SNC-Lavalin, which has acquired and integrated a series of big firms over the years, including Kentz in 2014 and WS Atkins in 2017. CIO Steve Capper joined the company in February 2020 and has worked to bring disparate people and systems together as a single IT organization.
Digital transformation at SNC-Lavalin comprises several strands. Capper’s team is running a three-year program to consolidate multiple enterprise resource planning systems into a single, cloud-based instance from Oracle. His team has also implemented VMware’s virtual desktop infrastructure Horizon to create a trusted, single source of data.
Capper estimates SNC-Lavalin uses about 5,000 applications for areas such as heavy engineering and business information modelling from software providers including Bentley Systems, Autodesk and Esri. The aim is to consolidate applications and to create an integrated platform that Capper refers to as a “single world”, which allows the company’s designers and engineers to leverage data assets quickly and effectively.
What’s the key take-away for engineering executives who are dealing with M&As?
Mergers and acquisitions give engineering executives the chance to acquire the technologies and talent for digital transformation. Conversely, any engineering company that acquires another business must have a long-term strategy for IT integration. So, while digital transformation isn’t always the main impetus for M&A activity, it’s likely to be an essential ingredient for post-merger success.