As M&A Activity Heats Up, Technology Upgrades Can Help Mid-Sized Retailers Increase Brand Value

By John Tait, Global Managing Director, TNS Payments Market

Outdated network infrastructure can negatively impact the terms of an M&A deal for a retailer.

For many owners of midsized retail businesses — including fuel stations, convenience stores, grocery stores, and quick service restaurants (QSRs) — hearing two letters of the alphabet joined together quickens their pulse and gets them thinking about the future.

Those alphabet letters? ‘M’ and ‘A.’

While not every retailer is looking to sell or be acquired, of course, plenty are at least willing to listen when a potential buyer comes a-knockin’. This is especially true after the past year. Retailers (the ones who were able to stay in business, that is) still face numerous challenges on an individual level resulting from the pandemic’s effects, while COVID-19 will continue to impact entire industries and economies for some time yet.

Consulting firm AlixPartners revealed in Oct. 2020 U.S. restaurant debt is reaching perilous levels. Two of four scenarios that McKinsey modeled found global oil prices might not recover to pre-pandemic levels until 2024; a third scenario found they might never return to past levels. And KPMG reported retailers across the globe are no longer able to rely on conventional forms of cost-cutting to shore up margins and rebuild after the pandemic year.

These challenges made 2020 a banner year for acquisitions and consolidation, with the value of M&A deals targeting the retail sector increasing 15% year-over-year from 2019 to 2020. To name just a few of the past year’s most notable retail deals:

• In EMEA, Portugal’s most notable smaller deal was the EUR 21m sale of food and tobacco distributor Augusto Duarte Reis to conglomerate Grupo BEL.
• Alimentation Couche-Tard Inc. entered Asia — a new market for the company — by buying Convenience Retail Asia Limited (Circle K HK) and 377 of its C-stores for approximately $360 million.
• Quality Restaurant Group purchased 62 Sonic Drive-In QSRs in Alabama and Florida.

And many buyers are just getting started. EY predicts M&A activity is likely to accelerate in 2021 and beyond “as companies position themselves for improved economic activity and reframe their future for the post-COVID-19 pandemic era.” This is great news for midsized retailers looking to sell off branches or even their entire brand in the next one-to-five years.

But there’s a catch: To get the most value out of a sale, retailers may need to make some upgrades and investments, especially around IT infrastructure and technology.

Why Technology Matters In M&A

Buyers are acutely interested in what a potential acquisition’s technology setup looks like — including behind the scenes — because this element is critical to M&A success. For starters, IT infrastructure dictates how fast and how easily the buyer can accommodate, absorb, or unite with the seller. Additionally, buying a brand with digital transformation capabilities will be a key “offensive M&A strategy” in 2021 because it can help the acquiring company transform its own business to safeguard the future, according to Deloitte.

But those things only affect the buyer. Why should retailers bother investing in new technology, if they’re exiting? Here’s a pretty good reason: A brand’s technology environment also can affect the terms of the deal — meaning how much money a retailer gets for the sale of a brand or storefronts.

That’s because purchasing companies with outdated technology can impact the buyer’s revenue and the lifetime value of an acquired brand. Consultants that advise private equity firms and other acquiring entities even have a term for this: “technical debt.”

M&A consultants often advise their clients to take a good, hard look at the technology portfolio and posture of any brand they’re considering buying to ensure they get the most out of an investment. If a pre-deal audit reveals a brand’s IT infrastructure is not up to modern standards, the buyer now has the leverage to renegotiate to a lower price.

Upgrades Add Value To A Retail Brand

With experts like EY predicting M&A activity will be red-hot in 2021 and beyond, any retailer entertaining the idea of selling should audit their own business, particularly their technology infrastructure, to see what they need to begin upgrading now. This will ensure they can get the maximum value for their brand.

While there are several areas buyers will look at, it might be wise to start with foundational networking infrastructure, especially for retailers still running operations on an MPLS or other decentralized network. More modern options like a managed-services software-defined wide-area network (SD-WAN) can simplify network management now, while also offering potential future buyers some attractive qualities:

• A retail brand’s IT infrastructure impacts the speed and smoothness of integration with the acquiring company, which thus determines how fast a firm can start reaping the value of its investment. SD-WAN managed services allow a firm to turn on and connect assets quickly, and — depending on the equipment and/or vendor — can protect sensitive personal and financial data and traffic, so the security of the firm’s existing environment is not compromised.
• SD-WAN can act as a network overlay that would allow a buyer to integrate multiple stores dispersed across a geographical area at the network level. A PE firm or acquiring company thus can connect everything in its portfolio under one network — even if some of the brands are still running on legacy systems — and keep stores running under a common business model as the firm begins refitting locations.
• An M&A process can take anywhere from six months to years to finalize. Diversity of managed communications, combined with the intelligence of SD-WAN, can improve a branch’s uptime, reducing the risk that POS terminals will go down and interrupt business at the store level — so buyers keep pulling in revenue throughout the M&A process.
• Using a combination of managed wireless and IP connectivity with SD-WAN instead of purely MPLS can lower or eliminate circuit costs for retailers operating in a mix of rural and urban markets. This saves retailers money now while offering future cost savings to potential buyers.
• An acquired brand’s network will need to be able to support any future digital bells and whistles for an “offensive-M&A-strategy” buyer with an eye for digital transformation capabilities. Because SD-WAN can use the best network route available at any given time, it allows different types of network traffic to be prioritized as needed. This provides redundancy and allows retailers’ networks to support new in-store and eCommerce digital transformation initiatives: free customer Wi-Fi; high-bandwidth services like digital concierges; omni-channel payments; smart cameras that provide in-store video analytics; and more.

Retailers looking to sell naturally want to get the most value for their sale, and — as retail M&A and consolidation activity continues to heat up — upgrading technologies now will set up companies to get the best price for their brand or locations. Investing in dynamic network technologies like SD-WAN managed services will help retailers modernize and boost their brand’s value for any future deal while providing them with a faster, more reliable, more secure network in the meantime.

About The Author

John Tait is Global Managing Director of TNS’ Payments Market business. He is responsible for identifying and driving growth across the Americas, Europe, and Asia Pacific regions, and is focused on meeting the unique requirements of TNS’ customers.