The next wave of digital transformation M&A could focus on investment in products that help businesses acquire and retain consumers. Deals driven by extracting cost-synergies continue to be on the menu, but that relatively low hanging fruit is likely to be replaced by higher return digital strategies. “Getting closer to the consumer is imperative,” says EY-Parthenon principal Laura McGarrity. Investment in “customer adoption, loyalty, those metrics that are imperative to investment. That’s the greatest return.”

Acquisitions in digital transformation are set to continue as the share of corporate spending allocated to technology rises, though the nature of expenditures tells a story of a maturing industry. Companies that used to splurge on building out platforms are turning to investments in running them. 

That interest could run hottest in the healthcare sector, said a private equity source. Deals in the space used to turn on eliminating cost synergies by, say, digitizing extensive archives or moving in-patient visits online. Now, the source says his firm is executing on transactions that increase patient loyalty and retention.

In effect, last year’s model of combining a single healthcare provider with a suite of commentary technology add-ons has been inverted. Data and technology providers with applicable products to healthcare services are the platform, he says.

“I will tell you, from a maturity and acceleration standpoint, life sciences and health and wellness are up there in terms of industries getting so creative with the levers they’re pulling,” says McGarrity.

Partnerships with technology companies to leapfrog competitors are one such lever, but so is cooperating with venture capital. Healthcare companies are going upstream to seed-level investments alongside VCs to get access to tech deals, McGarrity adds.

Future investments might not even be structured like recent deals. Sharing costs across development cycles is increasingly important for companies at a loss for how to measure return on digital investment. Enter the partnership model. With less need for investment in fixed costs of talent development, partnerships shine as an alternative to M&A, McGarrity says.

It’s not just spending that’s increasing. Executives are also focused on returns. Nearly double the 23 percent of executives polled by a recent EY survey in 2020 now say they are measuring yields on digital investment. And the focus on results shows, well, results of its own. Those companies measuring digital investment returns report yields averaging 3.2 percent higher in 2022 than in 2020.

But that leaves nearly half of those surveyed without a concrete measure for digital success.

“Companies still have a long way to go on measuring the return on digital investment, both to measure on qualitative and quantitate metrics, the intangibles that come with it,” says McGarrity.

The issue is structural as much as it is about choosing metrics. How does a company choose an operating model capable of leveraging digital innovation? Given the breadth of potential avenues to pursue in the wide-ranging field, where should sponsors spend the most time? Many acquirers focus on several capabilities instead of honing in on a few, scalable solutions that could benefit most from capital allocation.

“Companies are now taking a more focused approach given the risks and market dynamics, not lessening investment but putting it in a much more specific place,” says McGarrity of current challenges facing acquirers. Another potential pitfall of the rush for digital solutions is “Certainly risk appetite; companies are concerned about not moving fast enough.”

It’s an issue acquirers will continue to grapple with as digital investments differentiate marketplace winners from the rest.

Brandon Zero