In more and more industries, we are seeing two kinds of businesses emerge: those that have effectively integrated IT into their processes and those who haven’t. Of the two, businesses leveraging technology well tend to be more valuable. All things being equal, acquisition targets with a good IT story tend to sell at higher multiples: buyers generally give a 1-2x EBITDA premium to businesses they believe are effectively using technology to positively impact the business.
Not surprisingly, one recent survey by Deloitte found that 20% of executives at top 1,000 US companies rate IT as the number one driver of their M&A strategy. Given the fact that the executives’ other concerns have an implicit or explicit IT angle as well [expanding the customer base in existing geographic markets (19%), expanding or diversifying the product or service (16%), or strengthening their digital strategy (12%)], it’s clear a thoughtful IT strategy is more important than ever.
This isn’t just a trend – although tech is trendy – it’s based on some solid business calculations. We have seen again and again that the margins of a business tend to expand as automation creates additional capacity and operational efficiencies. Every day, businesses in traditional industries are becoming more tech-enabled, and in many cases even going so far as to change their DNA from a traditional business leveraging tech to a tech-business providing solutions to traditional markets.
Over the past 15 years, information technology companies have grown from about 15% of the MSCI’s US index to 25%. The tech companies themselves are also more tech-intensive now than they used to be: the percentage of revenue they spend on R&D and capital expenditures has risen from 13% to 18%. Even the labor market seems to have recognized the writing on the wall: one recent survey found that 77% of the US workforce is now undergoing some kind of tech-training or retraining.
Integration is essential
Of course, the amount of value generated depends on just how integrated the company’s IT infrastructure is with its operations. In general, the market now divides businesses into three stages of maturity: those that use IT to streamline operations and reduce cost (Stage 1); those that, in addition to taking advantage of its capacities for efficiency, use IT as a tool for sales and revenue growth (Stage 2); and those who have achieved Stages 1 and 2 and have begun using IT to create a new profit center for the business, including finding new profitable opportunities in monetizing their data (Stage 3).
If the company has reached Stage 3, truly proprietary IP or data can add an additional 1-2x EBITDA premium. However, Stage 3 marks a dramatic transformation: at that point, a company is probably no longer a service business that’s enhanced with technology but a technology business that provides services.
Not just for the big guys
It’s important to note transformational technology is no longer just for large enterprises. In fact, if you are a small- or medium-sized business, IT can be a powerful way to enhance value quickly. If you aren’t tech-savvy yet, it’s worth keeping five points in mind:
- Find a reputable advisor. If a field is new to you, you don’t always know how much you don’t know. Talk to people who do.
- Come up with an outsourcing strategy. In the end, IT tends to save money and increase efficiency, but maintaining systems can be an expensive distraction. As with most non-core facets of your business, look for external partners who can handle that for you so you can focus on doing what you do best, running and growing your business.
- Make sure your plans begin with buy-in at the top. Many IT projects go wrong because they didn’t have sufficient support from the C-suite.
- Stay platform agnostic if you can. Although there are exceptional circumstances, beware of arrangements that require you to be held captive to a single brand or provider.
- Don’t worry about originality. When it comes to IT and your business, it’s worth remembering Thomas Edison’s dictum that an invention doesn’t have to be original, it just has to be original to the domain. One secret of Edison’s productivity was that he reapplied ideas used in one area somewhere else. New to you may well be new enough.
Finally, keep in mind that technology is changing so rapidly that it may be easier to catch up than you think. Today’s hot technologies, such as blockchain, are so new that some of the most experienced people out there are under 25. Nor do you need to be in Silicon Valley. Many of the most sophisticated IT applications in the world now are being pioneered in countries that scarcely had telephones two decades ago. As the investment fine print always says, past performance is no guarantee of future results.