digital, disruption and deals - ey - us · the characteristics of “digital elites”: digital...

Confidential: not to be reproduced without written permission from EY-Parthenon

Digital, disruption and deals“Is your firm thinking about digital correctly?”

Capital Roundtable presentationMay 10, 2018

EY-Parthenon |

Agenda

► Digital disruption in sectors and transactions

► The characteristics of “digital elites”

► Digital and the transaction life cycle

EY-Parthenon |

13% 49% 38%Impact over the next two years

No disruption Moderate disruption Complete disruption

15% 52% 33%Impact today

Level of digital impact: today

Level of digital impact: two years

Complete disruption: from 33% today to 38% over the next two years

Digital disruption33% of companies are currently experiencing complete disruption today

* By “complete disruption”, we mean the point where technologies achieve deep penetration and where changing

competitive dynamics put pressure on revenue and profits.

Source: Digital Deal Economy Study, EYGM Limited, 2018.

EY-Parthenon | Source: Digital Deal Economy Study, EYGM Limited, 2018.

Level of impact: complete disruption by sector

24%

29%

35%

46%

36%

40%

38%

46%

46%

22%

26%

29%

31%

33%

35%

38%

42%

43%

Consumer products and retail

Media & Entertainment

Oil & Gas

Life Sciences

Power & Utilities

Mining & Metals

Industrial Manufacturing

Telecommunications

Automotive

Today Two years

Digital disruptionLife sciences/health care is expected to experience the most disruption over the next two to three years

EY-Parthenon |

Digital disruption: life sciences and health careLife sciences digital market map: beneficiary vs. value chain

Research

and discovery

Clinical

development

Manufacturing

and logistics

Commercial

operations

Treatment

and patient

experience

Consumer

genomic data

analysis

AI-guided

clinical trial

mapping

Digital

adherence

management

Patient journey

support

applications

Patient

Health care

practitioner

Infrastructure/

enablement

Value-based

care

optimization

Inventory

management

applications

Companion

diagnostics

AI-guided

clinical decision

support

Patient data

aggregation

services

Medical genomic

data mining for

research and

development

Adaptive clinical

trial design

Genome

sequencing in

clinical trials

Predictive

maintenance in

manufacturing

3D-printing of

complex Rx

RWE-driven sales

force optimization

Predictive

analytics for

value-based

contracting

Closed-loop

drug/device

combo

Digiceuticals

Pharma/

biotech

Clinical research

organizations

Medical

deviceTechnology

EY-Parthenon |

Digital disruption: health careDigital investments in health care are a significant portion of overall activity; VC stage activity highlights significant investment on the horizon

Source: Pitchbook, EY-Parthenon analysis.

Digital investments in the health care industry

2017

Health care digital investments by type

2017

EY-Parthenon |

Note: *Other consists of incubator/accelerator programs and grants; **Corporate Venture Fund investments may

also pool funds from traditional financial service firms in investment rounds.

Source: Pitchbook 2017, EY-Parthenon analysis, company websites.

Digital disruption: life sciencesOutside investment in digital life sciences/pharma in 2017 was driven in volume by venture capital firms, often with a focus on diagnostics …

Digital investments in the life sciences industry

2017

Life science digital investments by investor type

2017

EY-Parthenon |

Digital disruption: health care and life sciences… leading to an explosion of digital technology applications

Automated delivery

► Drones

► Self-driving cars

Augmented reality

► Connected eyewear

► Operating room of the future

Genetic technologies

► Low-cost genetic sequencing

► Gene editing

Internet of everything

► Smart appliances

► At-home diagnostics

► Connected clothing

Cheaper computing power and storage

► Private data cloud

► Big data analytics

Robotics and automation

► Robotic surgery

► Robotic caretakers/caregivers

► Exoskeletons

Blockchain

► Patient medical records

► Drug supply chain integrity

► Clinical trials

3D printing

► Bioprinting – organs, bones, teeth

► Surgical instruments

► Devices, e.g., pacemakers

Artificial intelligence

► Drug discovery

► Diagnosis

► Patient monitoring

Device miniaturization

► Smart tattoos and bandages

► Digital pills

► Medical-grade wearables

Health care

technology

EY-Parthenon |

Digital disruption: business information servicesDeals span the entire value chain, although there is a disproportionate share in the data aggregation and organization step, driven by SaaS and RPA

Source: Pitchbook.

Deal count by value chain step and technology

2017

EY-Parthenon |

Digital disruption: business information servicesDeal activity spans a range of technologies with SaaS platforms, automation programs, and AI and machine learning being the most prevalent

Source: Pitchbook.

Deal count by technology and buyer type

2017

EY-Parthenon |

Digital disruption: diversified industrialsThe largest diversified manufacturers are leading the digital transition in the last five years with 40% of investments relating to digital

Note: *22 diversified manufacturers were included in this analysis and are listed on the following slide. See

previous slide for definitions.

Source: Capital IQ, EY-Parthenon analysis.

Transaction activity by diversified manufacturers* over time by deal type

2012–17 Q2

EY-Parthenon |

Digital disruption: consumer packaged goods/e-commerceThe personal care category is particularly well-suited for e-commerce given product size, price point and purchase frequency

Source: 1010 Market Data , EY-Parthenon analysis.

Top US consumer packaged goods categories online sales

2016

Nonperishable Small size High price/margin Regular usage

Products are not perishable

and do not require

refrigeration – two of the

major challenges in grocery

Items are generally small,

making them easier to ship at

an affordable price

Many items are priced high

enough to absorb shipping

costs, leading to online

availability

Consumers use products

regularly, which leads to

repeat purchases

Reasons for e-commerce adoption

Personal care categories

EY-Parthenon |

Digital disruption: personal carePersonal care deals have primarily focused on digital and e-commerce brands and targets that create supply chain efficiencies

Note: Deal activity was pulled from Pitchbook. Based on the target description, deals were tagged as “Digital” or “Other.”

Note: Cosmetics deals are excluded in this analysis.

Note: Pitchbook data is inclusive of mergers and acquisitions, private equity buyouts and later stage venture capital rounds.

Source: Pitchbook, EY-Parthenon analysis.

Personal care deals breakdown

2017

EY-Parthenon |

Digital disruption: cosmeticsInnovative digital technology is increasingly disrupting multiple aspects of the traditional supply chain

Source: EY-Parthenon analysis.

Digital disruption along cosmetics supply chain

Cosmetics

manufacturing

Specialty

stores

End

consumers

Department

storesTraditional

marketing,

including

samplingResearch

and product

development

Online

marketing

Dis

trib

uti

on

to

re

tail

ers

Specialty

online

platforms Dis

trib

uti

on

to

co

nsu

me

rs

Data-driven product

development3D printing

Customized batch

technology

Quick-turn

direct-to-consumer

Shoppable user-

generated content

A/R or

nontraditional

sampling

Digitally enabled

promotions

Direct-to-

consumer

EY-Parthenon |

Digital disruption: restaurantsRestaurant technology deals compose roughly a third of all deals in restaurants and occur with a variety of emphases, most notably delivery

Source: Pitchbook 2017.

Restaurant deals by

Digital/non-digital and investor type

2017

Dig

ita

lN

on-d

igita

l

Digital restaurant deals by

technology type and investor type

2017

Digital

None of the investments in

technology platforms were

initiated by restaurants

Other includes:

1. Management (n=3)

2. Marketing (n=2)

3. Personalization (n=1)

4. Experience (n=1)

5. Restaurant search (n=1)

EY-Parthenon |

Digital disruption: retailCorporate entities and investors are involved at equal rates in retail and digital retail deals

Source: PitchBook 2017, EY-Parthenon analysis.

Deals in retail, by investor type and digital type

2017

EY-Parthenon |

Digital disruption: automotiveDigital disruption is impacting several different parts of the value chain

Source: EY-Parthenon analysis.

Auto repair

equipment

manufacturer

(Dover brands; Snap-On;

Fortive)

Auto repair shops

(Dealer service, collision

shops, independent

repair shops)

Distributors

Online portals

(e-commerce)

“Big box”

retail stores

End consumers

do-it-for-me

End consumers DIY

Unplanned

(accident)

maintenance

Insu

ran

ce

Recalls

Planned

maintenance

Auto repair value chain in a digital world

Salesforce

enablement

Price

comparison

capabilities

Predictive

maintenance/

proactive

fulfillment

Additive

manufacturing/

rapid

prototyping

Same day/

next day

delivery

Supply

chain

optimization

Aftermarket

e-commerce

Inventory

management

Digital

marketing

Digitally

enabled

claims

EY-Parthenon |

Agenda




EY-Parthenon |

The characteristics of “digital elites:” digital maturityOur assessment of digital M&A maturity found only 14% of companies werehigh-performing “digital elite” companies


1

2

3

4

5

6

7Buy versus build

Digital capitalstrategy

Strategic portfolioreview

OriginationDigital valuation

Digital diligence

Strategic operatingmodel

Learners Potential Elite

On average organizations only excel in one area of digital M&A. There is great variance

between the elite who lead at digital M&A and those who are still very much learning.

Percent

of sample

Number of areas

where they excel

Elite 14% 4+

Potential 29% 1-3

Learners 57% 0

EY-Parthenon |

Learners

(57%)

Potentials

(29%)

Elite

(14%)

Fu

ture

pro

ofi

ng

25%

28%

24%

60%

64%

95%

96%

95%

Gaps in digital capabilities are built into strategic planning

62%


We have a coherent and aligned buy and build approach

Digital M&A is top of the CEO and senior leadership team’s agenda

EY-Parthenon |

Learners

(57%)

Potentials

(29%)

Elite

(14%)

Dig

ital

ca

pit

al s

trate

gy

Str

ate

gic

po

rtfo

lio

re

vie

w

Percentage of budgeted acquisition capital allocated to digital

29%

22%

41%

69%

45%

99%


We have a clear long-term divestment strategy as part of our transition to a digital model

EY-Parthenon |

Learners

(57%)

Potentials

(29%)

Elite

(14%)

Ori

gin

ati

on

Dig

ital

va

lua

tio

n

Diligence when acquiring digital assets is highly effective

27% 65% 98%

32% 71% 98%

33% 67% 98%


Company is making a significant and sustained investment in building a digital ecosystem

Valuation model for digital M&A is highly effective

EY-Parthenon |

Learners

(57%)

Potentials

(29%)

Elite

(14%)

Dig

ital

dil

ige

nc

e

17% 62% 99%

27% 59% 94%

32% 67% 98%

30% 71% 95%

30% 63% 95%


Integration plans identify the actions required to preserve the value of the target

We conduct a thorough assessment of the target’s IP during the diligence phase

We carry out technology due diligence

We carry out cybersecurity due diligence

We apply data analytics and/or social media analytics as part of due diligence

EY-Parthenon |

Learners

(57%)

Potentials

(29%)

Elite

(14%)

Str

ate

gic

op

era

tin

g m

od

el

32% 68% 95%

32%

34%

29%

68%

67%

70%

95%

94%

92%


Confidence in ability to retain talent

Confidence in ability to manage cultural differences

Confidence in ability to balance cost efficiency with growth/innovation in the target

Confidence in ability to scale up intellectual property and technology

EY-Parthenon |

The characteristics of “digital elites”: digital deal economyMost challenging aspects of a digital acquisition strategy


19%

18%

15%

13%

12%

12%

11%

Strategy

Integration

Speed

Funding

Identifying suitable targets orprospects

Due diligence

Valuation

Question number: SA6

What is the most challenging aspect of a digital acquisition strategy?

Sample size = 921

EY-Parthenon |

8%

9%

11%

19%

20%

7%

9%

10%

14%

17%

CFO

CIO

CTO

CEO

CSO/head of strategy

Overall sample Elites

The characteristics of “digital elites”: digital deal economyElites make digital M&A strategy a CEO issue and align build and buy tactics


Elites are more likely to have the CEO and the chief strategy officer leading the digital strategy initiatives

Question number: SA0

In your company, who is responsible for the primary aspects of digital transformation relating to funding?

Sample size = 921

Person responsible for the primary aspects of transformation relating to strategy:

EY-Parthenon |

The characteristics of “digital elites”: what is digital?Leading organizations need to reframe the question

Digital

1.0

► Description: Companies in

this first tier are thinking

about their website,

“digitizing” existing content

and core technology

platforms

► Key decision-makers:

technology department, CIO Digital

2.0

► Description: At this phase,

companies have a more

developed use of digital and

consider online marketing, use

of social media and new sales

channels/go-to-market

strategy

► Key decision-makers: CMO,

CTO/CIO Digital

3.0

► Description: Companies with a

robust understanding of and

sophisticated use of digital

incorporate a digital lens into

everything they do, considering

new business models and

leading digital disruption to

better serve customers,

partners, employees and

suppliers

► Key decision-maker:

CEO

From …

“What’s your

digital strategy?”

… to

“What’s your

business strategy

in a digital world?”

EY-Parthenon |

Agenda




EY-Parthenon |

► Sector attractiveness

► Theme attractiveness (company, sector, subsectors, geography, add-ons)

► Commercial

► Financial

► Human capital

► IT

► Operational

► Tax

► Day 1 readiness

► 100-day plan capital plan

► M&A/growth strategy

► New market/channel strategy

► Portfolio optimization advice

► Pricing

► Customer and product segmentation

► Sales force/market mix effectiveness

► Cost-reduction opportunities

► Process redesign

► Supply chain transformation

► Manufacturing strategy

► Organizational design

► IT and finance transformation

► Working capital improvement

► Capex/PPE optimization

► Restructuring/ divestiture

► Liquidity enhancement

► Real estate efficiency

► Strategic plan

► Value story creation

► Exit readiness

► Sell-side diligence

► IPO readiness

PE transaction life cycleWhile digital affects every area of the transaction life cycle, we have highlighted 10 high-priority digital opportunities

Not all services on this slide are permissible for audit clients/affiliates of audit clients

Exit

Portfolio company holding period

Revenue enhancement Margin improvement Capital efficiency

Investment

inceptionDiligenceOrigination

Digital sector

attractiveness

assessment

Digital

“best fit”

acquisition

identification

Integrated

“digital

diligence”

(valuation, risk,

tech, IP, talent)

Cyber risk

assessmentDigital disruption portfolio review

Digital go-to-

market

optimization

Digital supply

chain

effectiveness

Opera-

tionalizing

IOT

Strategic

digital

operating

model

Customer experience

1

2

4

8

5

76

3

9

10

EY-Parthenon |

Digital, disruption and dealsFive key takeaways

“Digital” means many different things to different people in the

organization.

“Disruption” is attacking every sector and will get even more intense over

the next two years.

There are opportunities and risks emerging for every company, resulting

in a flurry of deals from PE, corporate and VCs.

The “digital elites” embrace digital through all areas of their business.

There are 10 high-priority areas for digital focus within the transaction life

cycle, ranging from integrated diligence to new business models to

supply chain to cyber risk.

1

2

3

4

5

EY-Parthenon |

About EY-ParthenonEY-Parthenon professionals are global leaders in strategy consulting. EY-Parthenon teams are

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Co-head of Private Equity

EY-Parthenon

Ernst & Young LLP

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