Technology M&A: Resilient in the face of COVID19 crisis

Constant changes in technology, reducing life cycle of products, limited resources and increasing intensive competition have pushed many companies to quickly develop their technology and innovation capability through external sources. M&A can be a result of many different motivations which include search for new technological resources. While this has been one of the conventional M&A strategies its importance has grown with rapid technological development across the globe. The use of technology in our everyday life has significantly increased and technological disruption of industries has become common.

Like all other M&A strategy, technology-driven M&As have their own pros and cons. On one hand they help companies to skip time consuming in-house innovation process, easily expand into new business areas and maximize sales of products & services. On flip side, acquiring a new technology can be expensive, there could be challenges in implementation of technology and there are uncertainties about the impact of new technology on business & its relevance.

Factors contributing to Technological Development:

While technological development is not a new process but we are surely experiencing greatest acceleration in technology progress and impact of same on our regular lives. Below are some of the factors that have contributed towards this fast paced growth:

1. Interned has been a prominent factor in converting the world into one big technological lab. Due to internet and knowledge sharing economies, it is easier to learn about latest technological development, discover methods to replicate them and finding ways to improve them.
2. There has been a rapid increase in investment in technology due to growing global wealth, more efficient capital market and increasing link between investment capital and technology development.
3. As mentioned earlier, the use of technology in our everyday life has increased. Our lives are now constantly intertwined with devices such as cell phones, laptops which rapidly evolve. This has increased technology absorption rates.
4. With the increased knowledge of technology, it is easier to access large number of technology users through internet which has improved the chances of converting technological development into short-term financial gain. This has resulted in the rise of companies like Google who employ large number of their resources into technology research and ventures.

Types of Technology driven M&A strategies:

Technology disruption has made a great impact on the businesses and on how the businesses create value. As part of an M&A strategy, acquisition of advanced technology can help a business to grow at a much faster rate than relying on other growth driving factors. Following are three different types of technology driven M&A transactions:

1. The first strategy is suitable for companies whose current business model has become redundant and are looking to acquire innovation, strengthen their present business or venture into new business areas. Example: A petroleum company acquires a company with renewable energy technology.
2. The next strategy is for IT companies who have the technology at different stages of development but who don’t have resources to complete the development process or don’t have a platform to monetize the technology. With help of this strategy the company can reduce the product launch cycle, access to wider customer base and increase their ability to deliver quality products & services to their customers.
3. The third type of M&A strategy is used by financially driven investors who want to use technology to create financial value in consistence with their overall investment plan. Technology can be used with every type of financial M&A strategy, ranging from turnaround strategies to long-term value growth to risk arbitrage.

Pros and Cons of Technology Driven M&A:

Tech M&A transactions have their own advantages and disadvantages. The main advantage is that the right technology can significantly improve the performance of the business which in itself can result in various positive developments such as increased productivity, profitability and investment. Another important advantage is that by externalizing different parts of technological development can create overall economic efficiencies. Like for an industrial group, it is financially beneficial if a large part of technology development is completed by a third party. Similarly a technology company can benefit from other parties developing and maintaining channels required to market the technology.

Technology driven M&A can pose some challenges for the companies. First, there is a chance that the acquired technology may not fit perfectly with company’s existing business model or it may be difficult to implement the new technology which can adversely affect the operational efficiencies. In case the technology is a precise fit and is readily implemented but there could be a possibility that the said technology may become obsolete or market may shift towards more advanced technological applications.

Due to uncertainties involved in the implementation and durability of technology, it becomes difficult to calculate its value. Investment funds can hedge the risk major technological investment by investing in various technology ventures but for a single company a major technological investment may be significant cost from its available business development capital. Further, financing companies may underwrite investment in technology at higher costs than more secure CAPEX or other investments which could put a financial pressure on company especially if it will take longer time to realize benefits from the technology.

Global Trend in M&A in Tech Industry:

M&A has become an important source of value in the technology sector over the past decade and will continue to play an extremely important role for tech companies in coming years. Most of the technology companies are aware of this and they also know how the rapidly the shape of M&A is changing with time. But only some of them are updating their strategies to take advantage of four key trends and those who don’t will miss out on some great opportunities.

1. Shift from Scale to Scope: There has been a huge surge in tech deal volume in past five years where large frequent deals have emerged with delivering returns 3% to 10% points higher than other less aggressive strategies. Noticeably, the nature of these deals have shifted from scale to scope as companies are looking for more than economies of scale from their acquisition. More deals are about broadening the scope, acquire new capabilities or expand to new markets. Most big tech deals have focused on three themes – connectivity, cloud, or data and analytics.
2. More Startups: Innovation in IT companies is shifting from in-house R&D in established companies to venture backed start-ups where the tolerance for risk is more. As a result more large companies are targeting startups to gain access to their intellectual property, data and talent. However, these deals are more challenging than scope deals as due diligence in such cases is complex because startups lack in long record of revenues. Also, identifying the right target is difficult as most of them are not yet selling any product or services. Therefore, many larger companies are setting up corporate venture capital to not only invest in the interesting ideas but to also keep an eye on upcoming technology.
3. Increase in Institutional Investors: There has been a huge interest from institutional buyers who are not only focusing on larger and established targets but giving a tuff completion to traditional acquirers to get at them. This increases demand for targets which means that tech companies who are interested in acquisition may have to pay more and should be more aggressive in their approach.
4. Withering the Recession: Recession creates opportunities for M&A. In 2008 M&A was an important strategy for tech companies to come out of the downturn. The IT sector was able to weather the recession much better than other sectors. As a result, the deal volume remained robust and lower premium provided opportunities for bargain. However, not all bargains are good strategic deals and the companies have to evaluate which target will be a better fit with their long-term strategy.

Impact of COVID19 on Technology M&A:

Technology M&A have remained resilient in the face of COVID19 crisis. The technology sector has been one of the least impacted sectors by the pandemic and the global deal activities have carried on despite the lockdown restriction. In fact the demand for technology products & services has increased as consumers and employees are forced to rely on technology for work as well as leisure activities due to lockdown. For example, Netflix has gained more than 16 million new subscribers during the lockdown period which more than double of what was forecasted.

The growth and durability of the technology sector throughout the pandemic has provided enough stability to support M&A transactions during this period.  Among the largest deals worldwide in the first quarter itself was a few financial technology mergers out of which the prominent deal was the merger between two French payments firms, Worldline and Ingenico, for US$10.1 billion.

Therefore, the technology sector appears to most confident in the deal outlook as even the technology experts are optimistic about the future with most of them expecting higher recovery compared to other sectors.The most lucrative target would be Internet of things, artificial intelligence, healthcare, fintech, big data, cloud computing, robotics, and Internet TV. The target that can adapt to the changing world including enabling people to work remotely will stand to gain the most during this crisis. However, the investors should consider potential long term consequences of the pandemic before any merger or acquisitions.