Deal-making activity, especially in M&A, continues despite evolving regulatory and economic environments. Indeed, dealmaking has been off to a shaky start thus far in 2022, as global concerns around inflation, the Russia-Ukraine conflict, and rising pandemic cases in parts of the world dampened deal enthusiasm. According to S&P Global, the number of megadeals, or those greater than $5 billion, dropped to 24 in Q1 2022 versus more than 30 for each of the quarters of 2021.  

However, the year is far from over, and we might see an uptick in deals, or in different types of deals, such as divestitures or recapitalizations.

Restructuring is Key to Attracting M&A Activity

Deloitte’s 2022 Future of M&A Trends Survey polled 1,300 executives at corporations and private equity investment firms and found that companies are focused on more transformational change — not just before considering or announcing a transaction but actually during the transaction itself.  

More than half (53%) of the companies surveyed restructured since the beginning of the pandemic, with 44% indicating that they are considering restructuring over the next 12 months.

Restructuring activities include changes to working capital, reorganization, cost reduction, and legal entity restructuring. The most common reasons for restructuring were process simplification, automation, and digital transformation. 

Nearly two-thirds (63%) of respondents reported that the success of their M&A activity is moderately or highly dependent on a successful transformation, with 34% of surveyed companies saying they are implementing transformational restructuring, even while deals are currently underway.

Restructuring While a Deal Is Underway

This might seem counterintuitive, or even impossible, but a restructuring, including a digital transformation, can occur while a deal is underway. This is possible for several reasons.

1. Deals Take Time to Close

While the senior leadership and investors of the companies in play might wish to see a speedy close to a transaction, the time to complete a corporate merger or acquisition can vary considerably. According to Investopedia, the time span can vary between six months and several years.

Indeed, during the due diligence process, as the acquiring company or investors are evaluating any and all documents related to the business operations of the target, the target company can decide to launch a digital transformation in parts or even all of its operations.

2. A Company Can Learn While Being Evaluated 

During the few months (or years)   of the due diligence process, the acquisition target can learn from the acquiring company’s leadership and advisers what would be needed to make themselves more attractive. The process can serve as a way to see themselves in a different light — to learn what would be needed to not only ensure a smoother transaction but also how the company can be leaner or more efficient post-transaction.

For example, it might be revealed during the due diligence process that the target company still uses employees to manually uncover irregularities in the accounts payable or receivable operations. During the due diligence process, the acquiring company or investors can advise that the target company augment these accounting efforts with AI or machine learning tools. In this way, due diligence can reveal opportunities for digital transformation.

What is a Digital Transformation Framework?

Simply put, digital transformation is the idea of harnessing the latest technologies to improve existing organizational processes. Digital transformation creates value by altering how a business operates and delivers value to its stakeholders, including employees, suppliers, partners, customers, and investors.

“Digital transformation also represents a shift in business culture, requiring businesses to experiment often, challenge the established way of doing things, and accept occasional failure,” notes online training provider SimpliLearn. This change in philosophy includes shedding procedures that have been around forever because “we’ve always done it that way.”

A digital transformation framework is the system, processes, and overall strategy of implementing digital transformation. The framework provides a blueprint, a formal plan that includes checklists, benchmarks, and standardized sequences to help a business become a more digital-friendly entity and continuously grow and evolve. This growth and evolution are expected to deliver an improvement in business results.

The Importance of a Digital Transformation Framework

Digital transformation frameworks are essential for today’s businesses because they provide a strategy to help companies not only become more efficient but also survive disruption by potentially unforeseen threats. 

Of course, one of the biggest threats is indeed digital itself: the use of technology, such as by a competitor to deliver more products and services faster, or customers who have embraced consumer technology (i.e., smartphones, apps, social networks) and expect companies to provide products and services through these technologies.

The potential for digital transformation to improve business processes makes it essential for any company wanting to not only stay ahead in its industry but also make it appealing before and during an M&A transaction. 

The benefits of digital transformation making it crucial to the company’s future success include the following: 

1. Improves Customer Experience and Increases Sales

Digital transformation allows a company to provide additional ways to interact with customers, providing communication channels that can be used for marketing, sales, and customer service. While not every customer in every company or industry discovers, transacts, or follows up online or via a mobile app, it is generally considered a must for any company to have these channels set up.  

During an M&A transaction, the acquiring company and its consultants can advise the target as to what set of digital transformation steps it might need to take in order to improve customer experience, thereby leading to increased sales

2. Reduces Labor Costs and Raises Productivity 

The other benefit of digital business transformation is on the operations side: raising employees’ productivity and even morale. Digital tools allow teams to automate key processes and keep information updated in a central location, allowing employees to work faster. Automating processes can also help companies lower the labor costs related to certain tasks and instead assign employees to higher-value and more profitable work.

The implementation of digital transformation, even in the midst of an M&A transaction, often relies on both IT leaders and business leaders. Since digital transformation and restructuring during M&A is normally time-sensitive, it is quite possible that such transformation might need to be underway as close to the decision to engage in that liquidity event as possible. The sensitive nature of a transaction means that those outside of senior leadership, such as IT and network/systems staff, might need special training about the circumstances of the digital transformation.

Components of a Successful Digital Transformation Framework

Digital transformation frameworks provide significant benefits for companies, especially as they are considering or are in the process of an M&A transaction.

There are several features or components of a strong, effective framework.

1. Set Goals for the Transformation Strategy

When performed during an M&A transaction, the goals might seem obviously short-term. However, the acquiring company or investor group is most likely not seeking a short-term fix. As such, any transformation strategy on the part of the target company should also include a framework for the long term. 

2. Assemble the Digital Transformation Team 

Digital transformation can become a complex undertaking, so it’s best to have a team dedicated to the work. The team should be cross-functional and can include both employees and consultants, including those who may have worked on digital initiatives before the M&A transaction is announced or is underway.

3. Break Down — and Possibly Discard — Current Operating Models 

A thorough understanding of the company’s current operating models is critical before the digitization of processes can be introduced successfully. The acquiring company needs to break down current workflows into steps, perhaps leaning on already-established process documents, in order to determine how software and digitization can improve each one.

4. Create a Step-by-step Guide for Transforming the Business Environment 

Just as documents for existing processes need to be examined, the recording, tracking, and documentation of digital transformation needs to be incorporated into the process. Step-by-step plans are important so that all stakeholders are on the same page.

5. Consider an Enhanced Customer Acquisition and Retention Strategy 

Companies undergo a digital transformation for profitability, gleaned from two major efforts: to streamline operations into a more cost-effective unit and improve customer expansion and retention. Businesses should leverage technologies to meet customers digitally wherever they may be, enabling conversations, transactions, and feedback. 

6. Analyze Process Improvement 

This step involves researching the current technology marketplace and evaluating the software offerings that are available to see what can be used to improve operations. This process of evaluation needs to also be part of the digital transformation process, because it can record the decision-making process that led to the selection of specific solutions.

7. Perform a Needs Analysis of the Business’s Required Technology 

Further to mapping the process, capturing the technology requirements of what is needed for transformation is also important. In addition to performing a needs analysis of the business’ technology, it’s also important to map these needs to what is currently available in the market and how feasible it would be to incorporate those technologies into the enterprise. 

8. Create a Roadmap With Key Performance Indicators (KPIs) 

This step requires a clear timeline filled with specifics. Again, if the digital transformation is to be carried out while the company is engaged in an M&A transaction, it may be difficult to meet certain KPIs, but as cited in #1, since there are long-term goals for a transformation strategy, there can also be long-term KPIs. KPIs can include a reduction in time handling customer service tickets or an increase in customer inquiries, as a result of the implementation of digitization.

9. Execute the Transformation Plan 

Once all of the analysis work is completed, it’s time to implement. There might need to be a tiered approach, such as certain departments, teams, or regions beginning their transformation before others, which can be helpful when needing to demonstrate early success. Organizations also find that harnessing learning and development tools to train the workforce on the new technologies or digitized processes also creates less friction and improves outcomes.

10. Prepare to Analyze and Iterate Moving Forward 

The success of a digital transformation requires the use of data-driven insights and analytics to see how the implementation is progressing. This analysis is essential to stick to the digital transformation strategy or decide to change course and make adjustments where needed. 

During an M&A transaction, it’s important for the target company to demonstrate success — or at the very least, on the way to success — as a way to validate that the transaction will create synergies, streamlined operations, and higher profitability.

How To Communicate the Process, Timeline, and Goals Of a Restructuring

Simply put, the digital transformation framework should contain three elements in order to launch:

Define or Explain the Nature of the Move to Transform

While the decision to digitally transform might be made by a consortium of individuals outside the target company or company receiving outside investment — the acquiring company, investors, and their advisors — eventually, the IT and change management teams will need to be informed about the reason for the change. As the changes might be of a sensitive nature, especially if carried out during an M&A transaction, there will need to be some training and non-disclosure agreements in place, to ensure a successful transition.

Create a Policy to Address the Transformation

The acquiring company or investors might create a policy for the transformation, but the target company’s internal resources who know the company’s operations much more intimately should also be involved in creating a policy to address the digital transformation.

Go-to Strategy for Carrying out the Policy

As cited above, implementation and execution are key. So as not to disrupt day-to-day operations and the experience of stakeholders, including both employees and customers, the go-to strategy for carrying out the digital transformation needs to also be created and discussed.

How to Ensure That Information Remains Secure 

A trusted virtual data room (VDR) partner is crucial at every stage of M&A. This is especially true during the due diligence process when the potential for financial restructuring and digital transformation exists on the part of the target company. 

A world-class VDR like Caplinked can ensure that highly-sensitive initial documents can remain secure, especially with a feature like Access Control Lists that can restrict access at both the group and individual levels.

Once a deal moves into the due diligence phase, Caplinked’s VDR delivers confidence to all parties that the strongest security measures are in place, and the tools included will help expedite the entire process, making the data flow more smoothly and shaving off weeks, if not months, off of the entire M&A timeline.

Start your free trial today to see how Caplinked can help streamline tall aspects of the mergers and acquisitions process.

Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.


Deloitte – 2022 M&A Trends Survey: The future of M&A

SimpliLearn – Digital Transformation Framework: Features, Benefits, and Applications Explained – What is digital transformation?

S&P Global Market Intelligence – Global M&A By the Numbers: Q1 2022

Investopedia – How Long Does It Take for a Merger to Go Through?