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    Digital ‘Have-Nots’ Merge to Compete with Digital ‘Haves,’ EY Says

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    Mergers and acquisitions will continue to surge in 2016, according to the Capital Confidence Barometer report released last week by the multinational professional services firm EY. And the surge will be driven predominantly by what EY is calling “digital disruption,” as the digital “have-nots” join forces to compete with the digital “haves.”

    I had the opportunity to discuss the report with Jeff Liu, global technology sector head for EY Transaction Advisory Services, and I opened the discussion by asking Liu for his definition of “digital disruption.” He explained it this way:

    Digital disruption has become an appropriate descriptor of what’s happening generally in the IT environment—not just within the technology sector, but within numerous sectors. The earliest examples would be the transition in the retail space—the use of retail technology by companies like eBay to change the traditional brick-and-mortar or storefront channel relationships. We describe a subset of that as e-commerce.

    Today when we talk about digital disruption, we’re really talking about the change in broader organizational business processes—broader strategies that are now much more dependent on IT. Big Data is a subset of that—the ability for data, both internally for some of these companies, and externally, to become primary revenue and expense drivers. So we view digital as a true strategy now that’s become a key catalyst for change, both in the tech industry and other sectors, much as consolidation has been a key strategy in, say, pharmaceuticals, or geographic expansion has been the case for social media, when you look at the middle-class environment in India or China. Digital itself has become an important overall organizational and company strategy.

    Liu stressed the point that the disruption now involves a lot more than e-commerce, as software is increasingly used to automate processes:

    What we’re seeing today as an example of disruption is the establishment of chief digital officers as a true executive function, because it’s become so important to reach end customers digitally, through various electronic channels. It’s become an important part of the ability to move operating profits significantly, because Internet of Things technology allows industrial companies to change the way that their expenses and operating costs of delivering what they do to end customers to become more efficient.

    So disruption is probably the easy concept to understand. Digital is a more general concept, which embraces the impact of the cloud, mobile, and not just Big Data itself, but the ability to actually work with, and derive insights from, large quantities of data that were either useless before, or were never really exploited before.

    As for why this digital disruption is spurring M&A activity, Liu said it has to do with the business world being one of haves and have-nots—those companies that are able to make the transition to adopting more digital strategies vs. those that aren’t able to make that transition:

    The ones that aren’t are primarily where we’re seeing a lot of M&A activity now. You can point to what’s happened with Dell and EMC, which will likely be the bellwether, largest transaction for some period of time. Both of those companies had their own specific incumbencies in the late ‘90s and mid 2000s.

    That’s not to say that storage in the technology space was never digital, in the sense that it was very different from analog storage on tape. But the reality is the digital catalyst that I’m describing—the cloud, the utility and pervasiveness of smart devices, the data aspects of what’s in storage—all of those created a lot of new entrants, whether you’re looking at some of the Big Data analytics players, or some of the cloud storage players, flash storage players, smart device players. Those have all put pressure on traditional companies that have created billions in value to make the transition.

    The first impact was for Dell to recognize that it needed to be more of a software, SaaS, cloud and smart device company. They went private in order to make that transition probably more seamlessly, away from the public markets. For a company like EMC, which has been the storage incumbent for decades, to actually combine [with Dell] to create a wider beachhead, if you will, has really been a strategic response, in our belief, to its own threats from new storage technologies, and maybe less of an incumbency in the cloud space. So one specific outcome has been for some of these companies to actually go private and consolidate.

    I asked Liu, in the case of Dell and EMC, which one was the have and which was the have-not, or if they were both have-nots. His response:

    I think both were probably have-nots, that have a better chance of  becoming something with scale, consolidation, and also being private. The other thing to remember is that through the acquisition, EMC will now become a private company with Dell, and have deeper-pocketed private equity investors and not be exposed to quarterly performance requirements from Wall Street as it’s trying to become more digital—more of a SaaS- and cloud-based company.

    Liu cited Xerox as another example of a have-not:

    To take a different perspective, there’s the activist [investment] activity that’s been announced in Xerox—another company that was largely in the analog space with copiers. Xerox, which may be making a slower transition to digital and cloud services than Wall Street may have wanted, now has Carl Icahn as an activist in their stock. So we’re seeing that type of outcome really spur M&A activity, as well, because a lot of these activists generally force M&A solutions as quicker ways to make the transition that is difficult to do organically.

    Finally, I asked Liu if he saw any of the findings from the survey that yielded the report as particularly surprising. He said there were two:

    One is that virtually all of the respondents feel that M&A activity is going to be an important part of their strategy going into 2016. That is an insight into how quickly the digital landscape is changing, and power is shifting to new competitor entrants. So the traditional method, where large, successful technology companies have made that transition organically, the way Oracle or SAP or IBM in their histories have been able to do, was you had a few years to develop competing solutions. I think today, M&A is a requirement, simply because you have to catch up quickly, and you may not be able to develop things organically, on your own, quickly enough to be truly competitive.

    On the other extreme, I think one of the surprising things was 30 percent of the respondents cited the particular importance of new product development, R&D, and innovation. But to me, that’s really 30 percent wishful thinkers. I think a lot of the takeaway from that is that if that’s what you’re saying, it’s probably too late. That group of respondents may soon recognize that the proper allocation of capital may be toward more M&A, vs. more internal investment.

    A contributing writer on IT management and career topics with IT Business Edge since 2009, Don Tennant began his technology journalism career in 1990 in Hong Kong, where he served as editor of the Hong Kong edition of Computerworld. After returning to the U.S. in 2000, he became Editor in Chief of the U.S. edition of Computerworld, and later assumed the editorial directorship of Computerworld and InfoWorld. Don was presented with the 2007 Timothy White Award for Editorial Integrity by American Business Media, and he is a recipient of the Jesse H. Neal National Business Journalism Award for editorial excellence in news coverage. Follow him on Twitter @dontennant.

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