M&A as a Digital Transformation Tool
Let's dive into a phenomenon that has transformed the corporate landscape: traditional companies buying startups not just as a financial investment, but as a shortcut to their own digital transformation. I know it may seem a little old to talk about digital transformation in times of AI, but the truth is that it's still about that.
When buying is faster than building
For years, conventional wisdom said that large companies should develop their own capabilities in-house. However, the reality proved to be more complex, especially when it became crucial for any company to compete on the frontier of information technology.
A CIO of a traditional company has two options: spend two years and millions of dollars developing a digital platform that might work, or acquire a startup that has already solved this problem and is ready to scale.
With the corporate world spinning faster and faster, the math is simple: Time has become the scarcest resource in the corporate world. When your competitor is already advancing digitalization, waiting is not an option.
Three resources that are not easy to buy
When traditional companies decide to buy startups, they are usually after three precious assets:
1. Out-of-the-box technology
Developing cutting-edge technology internally is an immense challenge for traditional companies. Approval cycles, risk aversion, and entrenched processes make genuine innovation nearly impossible.
Acquiring a startup with validated and ready technology brings an immediate competitive advantage. This is the technology acquisition thesis that we have already talked about here a few times. This thesis is the one that normally applies when the technology is for internal use, not to become a product, as in the case of the acquisition of Hyperplane by Nubank.
But even for a technology giant like TOTVS, buying technology from outside could be the move to reinforce the product or enter a new market. When it came time for the company to enter the inbound marketing market, for example, the possibility of purchasing RD Station did not compare in terms of timing to the possibility of developing something internally.
2. Scarce talent
The war for digital talent is perhaps the biggest corporate challenge today. There simply aren’t enough engineers, designers and product managers in the market.
Brazil's largest bank may offer competitive salaries, but how many elite developers would naturally choose to work there over a promising startup? Acquiring a full-fledged startup brings not only talented individuals, but already cohesive and productive teams.
When Nubank acquired Plataformatec in 2020 (in which case we discussed in detail earlier), they weren't just buying a consultancy, they were acquiring dozens of talented engineers who already worked well together.
3. Culture of innovation
This is perhaps the hardest to build organically. The culture of an established corporation tends to favor stability and predictability over speed and experimentation.
Startups breathe innovation and agility. A well-executed acquisition can bring this “innovation DNA” into the larger organization. The trick is not to suffocate the culture you just bought, which is the biggest risk in these cases.
Transformation models via M&A
There are some clear patterns for how traditional companies use M&A to transform:
Model 1: Purchase and fully integrate
In this model, the startup is completely absorbed by the larger company, with its technology and talents distributed throughout the organization. It works well when the main objective is to acquire specific capabilities or technologies that need to be implemented throughout the organization.
The risk? Nobody wants to stay and you can't tie people to chairs. Cultural difference becomes a reason for people to leave, when the intention was to transform the acquiring company. As they say in the corporate world, "the immune system rejects the transplant."
Model 2: Buy and keep separate
In this model, the startup continues to operate as a quasi-independent entity, often with its original brand and leadership intact.
The clearest example that comes to mind is Microsoft's acquisition of LinkedIn. While it requires a delicate balance between autonomy and strategic alignment, this model often better retains talent and innovative culture.
Model 3: Strategic acqui-hiring
Some acquisitions focus primarily on bringing talented teams into the company, even if the startup's technology or product is not the main asset.
In 2021, MercadoLibre acquired Kangu, a logistics platform, not only for its technology, but mainly for its logistics and technology team specializing in a sector critical to its growth.
Opportunities for founders
If you are a founder, this scenario creates significant opportunities. Here are some sectors where digital transformation via M&A has been particularly active:
Financial services: Traditional banks seeking fintechs for modernization
Health: Hospital and pharmaceutical groups acquiring healthtechs
Retail: Traditional retailers buying digital capabilities
Industry: Traditional manufacturing seeking IoT and analytics solutions
Insurance: Insurance companies acquiring insurtechs
To position yourself as an attractive target for transforming buyers, consider:
1. Ease of integration
Can your technology be easily integrated into the buyer’s legacy systems? The more documented and modular your architecture, the greater the perceived value.
2. Complete and engaged team
Corporate buyers pay premiums for stable, well-rounded teams. If half your technical team is leaving, it will devastate your value as a vehicle for transformation. This goes for the founding team too, especially if there is a large dependence on you. Read “Can Your Company Grow Without You?” to delve deeper into this topic.
3. Practical application
Demonstrate concrete cases where your technology solved real problems. Proofs of concept are valuable, but successful implementations are much more valuable.
How to negotiate with transforming buyers
Negotiating with corporations undergoing transformation requires a specific approach:
1. Understand real motivations
Often, the stated motivation ("we are buying your technology") hides the real one ("we desperately need your talent"). Understanding this gives you a significant advantage in negotiation.
2. Speak the language of transformation
Present your company not just as a business, but as a solution to the buyer's transformation challenge. Keep terms like “acceleration,” “digital enablement,” and “competitive advantage” on the tip of your tongue in your conversations.
3. Be realistic about integration
One of the biggest pitfalls in transformational acquisitions is underestimating integration challenges. Be honest about what you think will work and what won't. This will build trust, remove the impression that you are selling the company at any cost, and increase your chances of successful post-acquisition integration.
The challenges of post
The true test of a transformational acquisition comes after the deal closes. As a founder, you must prepare to:
1. Inevitable culture shock
Even in the best of circumstances, there is a period of cultural adjustment. Your 20-person team that used to make decisions in minutes may now need to navigate multiple layers of approval. You have to be cold-blooded, but also push back to the status quo without stopping your progress or knocking down your earn-out.
2. The battle for autonomy
Since much of the value of the acquisition is in the way you work, you will need to constantly negotiate to maintain enough autonomy to deliver results.
3. Realistic expectations
Corporations often have unrealistic expectations about the speed of transformation. Set clear expectations from the start about what is possible and in what time frame.
Conclusion: the future of transformation via M&A
As pressure for digital transformation increases across industries, M&A will continue to be a key strategic tool for traditional companies.
For founders, this represents an opportunity to exit beyond the traditional VC path. Building your company with awareness of this model can open doors to strategic acquisitions at attractive valuations.
And most importantly: in a scenario where venture capital becomes more cautious and IPOs become rarer, corporate acquisitions could become the most viable and attractive exit route for many startups in the coming years.
If you are building a digital company today, ask yourself: who could buy me not just for my business, but to transform themselves?