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M&A Integration: Creating Value From e-Commerce Transactions

E-commerce M&A

29Sep

Over the past few years, we have seen the advent of the 'pure click' retail industry i.e., a 100% digital business model with no physical presence, some familiar businesses are GILT, Flowers.com etc. Traditional brick and mortar companies are now transitioning to 'brick and click' business models and in some cases completely walking away from the traditional brick model. 

The retail industry's growth hinges upon their ability to exploit the digital trend, given loss of foot traffic in traditional stores with further decline expected. Given the nature of this shift, companies are looking to acquire new business models which can bolster their sales through new digital channels. Key revenue drivers include:

- Acquiring, retaining and servicing customers through PCs, mobile phones, tablets, video game consoles, smart TVs, and voice operated assistants

- Increased ability to track, predict shopping patterns on-line, and target specific advertising campaigns

- Increased sophistication of e-commerce platforms providing top notch user experiences

- Competitive shopping opportunity for users and data driven sales for sellers

E-commerce companies are also looking to exploit new trends such as personalization, advertising, re-targeting, new distribution channels, marketing, and customer experience design to drive customer engagement and revenue enhancement. Companies have figured out innovative ways to sell products digitally and also sell products that are digital in themselves - key trends include :

- Ability to sell globally

- Infinite shelf space

- Social media selling

- Peer to peer selling

- Social gaming

- Search engine based selling

Most companies today touch e-commerce in some way or will be doing so in the very near future, M&A transactions are seeing some consolidations mergers, some distressed M&A and large volumes of companies trying to acquire or migrate to a new business model. 

The value creation typically happens during M&A Integration, in order to capture and harness this value one needs to understand the key value drivers for e-commerce deals. During my experience in integrating e-commerce companies, I have come across multiple value drivers of which I have provided a non-exhaustive list below.

Please note that not every value driver is applicable to every transaction, both priority and applicability can vary depending on the transaction.

1. Understand similarities in existing e-commerce business models 80/20 rules vs higher concentration e.g (95/5 rule) versus more diluted product sales; document similarities and differences in customer segments within e-commerce and isolate high performing and high potential customer segments.

2. Target may sell digital media or other products or services that embody intellectual property (how does this compare with the buyer) - are there subscription models at play?

3. Develop customer retention strategies and safety nets for Day One (focus high performing and high potential customer segments).

4. Create cross-functional team across sales, marketing, service, pricing to develop mitigation plans across possible Day One issues such as brand protection, customer retention, and service disruption.

5. Core e-commerce value drivers need to be identified - typical value lies in (1) Active users (2) Active Customers (3) Talent (4) Technology Platform - understand what needs to be protected (Day One) and what needs to be enhanced (Beyond Day One) across both organizations.

6. Understand and document data flows across both e-commerce platforms, including interfaces with other front office and back office systems.

7. Ensure policy level alignment across buyer and target - typical policies include web site accessibility, privacy, terms of use, social media, safety, and security.

8. Harmonize and integrate other compliance considerations for Day One - compliance with law, binding website users across jurisdictions, appropriate disclaimers and limitations of liability ; understand when are customer contracts used (B2B) instead of standard terms.

9. How do suppliers contracts across both companies impact target operating model (across both companies) - confidentiality, availability, liability, credit card and payment controls etc.?

10. Target’s brand (trademarks and domain name) may be a key component of Target’s value, how does brand transition occur (if applicable)?

11. Target may have developed proprietary software or other technology that creates an important competitive advantage (how can this be preserved?)

12. Target may have patents or trade secrets relating to business methods, algorithms, processes or other technologies (how can these be monetized?)

13. Content of target’s website, including its 'look and feel', may be protected by copyrights and contributes to rich customer experience (understand similarities and differences with the buyer).

14. Website hosting - Possible source of synergy; considerations based on in-house capability, service levels required for the target operating model and third party ecosystem reliability across both companies.

Given multiple disruptive forces at play in the e-commerce M&A space, integrating to deliver value is going to be of paramount importance now and in the future.

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