PE firms Looking To Squeeze Out Higher Returns Need A Greater Focus On Tech Integration

By Craig Zampa and Dennis Bagley

As M&A activity gets hotter, private equity firms face a growing challenge: how to squeeze out the value they need from deals.

North American deals hit their second-highest level this century in the first quarter of 2021, adding to sustained upward pressure on valuations. PE firms paid an average 13.2 times a company’s EBITDA for U.S. leveraged buyouts in 2020, an all-time high, up from 12.9 times in 2019.

PE buyers are increasingly turning to bolt-on acquisitions to grow companies inorganically, adding more pressure on them to find the operational efficiencies needed to deliver their required returns.

In the search for efficiencies, tech integration and rationalization are powerful strategies that many pay lip service to, but few put into practice well. While integrating and updating IT systems to achieve synergies is a simple concept, it gets much harder in practice because it involves lot of potentially difficult change management that goes far beyond just buying some new tech tools and implementing new processes.

Done properly, tech integration and rationalization can yield significant cost savings through the centralization of systems and the reduction/reallocation of headcount, as well as improved cybersecurity that reduces the risk of expensive breaches.

In addition, technology can also be leveraged to digitalize a company’s business model and operations, creating new ways to connect with vendors and customers that yield efficiencies and boost revenues.

Tech integration is easy to overlook

In the mid-market, it can be common for funds to buy multi-generation, family-owned companies that have far outgrown the capacity of their tech foundation and processes to deliver efficiency. For example, these types of businesses can’t be scaled for the type of growth being sought by investors while there are so many loose-fitting puzzle pieces.

Technology transformation can’t be done on the fly, though. It’s a complex process that requires a great deal of careful planning and a broad perspective on the challenges involved.

To do it effectively, buyers should assess what they want tech integration to achieve and come up with an initial 100-day plan, followed by a plan for the next 6 months to a year and beyond. They need to more carefully consider the resources that will be required and how to ensure that the changes are broadly accepted and adopted.

Just as when building a house, good project management and design are crucial to ensure that the foundation is solid and that the hundreds of moving parts come together in a harmonious way.

The most common foundation of tech consolidation — and one that provides the most direct return on investment, for example — is a centralized ERP system.

Benefits are huge

 Technology is a key enabler of overall corporate transformation. For example, establishing consolidated customer service or procurement functions can be challenging without central, shared data, systems, and processes. By deploying foundational systems early on, the stage can be set for more aggressive cost take-out and synergy realization strategies.

It can also enable buyers to root out risks and exposures that might otherwise remain hidden. Consolidating and updating security systems may provide less immediate bang for the buck but is crucial to guard against the growing threat of cyber breaches that could have a large cost.

Continuing to maintain different security systems after an acquisition tends to increase exposure to risks by allowing separate standards and compliance practices to persist.

Robotic process automation is another example of how a technology investment can create higher returns. For investors concerned with talent availability at the companies they are invested in, RPA solutions may enable the automation of low-value tasks, such as data entry, increasing employee productivity, value, and scale.

The human aspect of IT change is also an often overlooked but crucial part of the puzzle. IT staff need to be consolidated into a single team so they can support end-users in a seamless way.

Employees across the business must be brought along on the journey through new processes and training to avoid having them become frustrated with change and revert to old ways of doing things.

Given the increasingly competitive M&A market, investors may be interested in exploring additional ways of creating value. Technology transformation and integration might be an appropriate strategy in an investor's overall playbook for further improving returns in these market conditions.

Craig Zampa is a consulting partner in the technology consulting practice at Plante Moran. Dennis Bagley is a partner and leads the technology consulting practice at Plante Moran.