by Baker McKenzie

Digital assets: Everything you need to know before acquiring

In this podcast on acquiring digital assets, experts from Baker McKenzie, Accolade, CTSI and Wind Point discuss crucial considerations and the pitfalls to avoid. How do tech acquisitions differ from other deals? How do you choose your targets? And what are the guests’ biggest tips?

What you need to know before acquiring a digital asset

Digital asset M&A volumes have surged with dealmaking in the technology sector totalling a record US$1.1tn in 2021, a huge rise of 71 per cent compared to 2020 levels and accounting for 20 per cent of overall M&A value. Buying a key digital asset can be a fast and effective approach to digitalisation, but there are crucial pre-deal considerations. It is a process that takes time, exemplary due diligence, expert deal execution and thoughtful integration.

With activity accelerated by the pandemic, now is the time to gain scale in the industry, according to Nathan Brown, MD of private equity firm Wind Point Partners. “We're at a window in time when there are a lot of companies owned by founders or families that are looking for both liquidity and a larger national platform.”

Innovative technology is, by its nature, less established than traditional assets. It is therefore more important that the incoming team is well incentivised and company culture taken into consideration. The target can often represent the”‘promise of a product”, explains Baker McKenzie partner Lawrence C Lee, which changes the way an acquirer should think about due diligence. Greater focus should be put on “identifying star performers, working with the target company's leadership to understand how to get the most out of the team, and how to incentivise to make sure people stick around after you close the deal”.

Proper data compliance due diligence is a time-consuming and expensive process, made more complicated when acquiring digital assets with consumers across multiple jurisdictions. A good understanding of the regulatory landscape is crucial. Baker McKenzie partner Sze Shing Tan says that compliance can significantly impact timing in dealmaking and companies often end up taking a risk-based approach. “Compliance issues for the lower risk areas are then left for the integration and post-acquisition workstreams.”

Rajeev Singh, CEO of Seattle-based digital healthcare company Accolade, which recently acquired PlushCare, advises that in nascent spaces it is important to think more like an investor than an acquirer. Considerations such as identifying the best technology stack and the most aligned culture should be done early on. However, in fast moving markets, he cautions againstfalling in love too early. Are you positioning yourself where the ball is going and not necessarily where it is right now?”

Identifying a common cultural alignment is a crucial first step, but ensuring smooth deal execution can be complex. Joe Oliveri, CEO of Corbett Technology Solutions, says that good communication between the parties is vital. “Ultimately there will be some tough items that come up that require negotiation. And sometimes you need to build that trust to get through it.”

Having a clear strategy, whether on the acquirer or acquiree side, is of paramount importance, especially when dealing with tight time frames for execution. “Any acquisition is going to create a little bit of churn in the water,” Lee points out, adding that it is crucial to be clear on why acquisition is a more suitable path than building in-house. “Being able to answer that question and have the rest of the organisation understand it is critical to any M&A deal.”

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FT Channels, a partnership destination that combines impactful and enriching multimedia content to spark curiosity and encourage discovery. Each vertical brings expert insights from the Financial Times and our Partners into the most pressing issues of our time.

FT Due Diligence is a video channel analysing the fast-moving world of M&A, illuminating the trends behind the complex global transactions and how to unlock value from acquisition deals. The channel alternates between independent reporting from FT journalists and insight on global dealmaking from law firm Baker McKenzie.