Mergers and acquisitions are becoming an increasing source of value in the technology sector
Companies are targeting startups to get access to their intellectual property, talent and proprietary data
Startups need support in the race of growth, reach and talent
The 2020 M&A trends report by Deloitte found that technology acquisition is the new No. 1 driver of M&A pursuits. 17 percent of respondents cite technology acquisition as the driving force behind company’s primary M&A strategy for the coming year. Combined, digital strategy alignment and technology acquisition accounted for about a third of all deals being pursued.
Technology deals have surged recently with overall deal volume growing each year. Mergers and acquisitions are becoming an increasing source of value in the technology sector and will continue to play an important role in tech companies’ growth strategy going forward.
Different Methods Of Innovation For Different Objectives
The rapid pace of digital innovation has meant that new capabilities go out of date if not fully implemented quickly. The imperatives to accelerate adoption and compete in the talent war are compelling companies to buy rather than build. Innovation in tech companies is shifting from internal R&D centres to venture-backed start-ups.
Companies are targeting startups to get access to their intellectual property, talent and proprietary data. They are leveraging M&A to gear up for new technologies such as 5G, artificial intelligence, internet of things, machine learning and cloud computing. The best way to make these deals pan out is to acquire companies in areas that are strategically adjacent to the core competencies of the acquirer.
Technology Companies Are In Deal-Making Frenzy
Software and online software companies grow faster than most industries. The rate of growth of software companies determines whether a company grow fast or die slow. The acquisition can be a powerful tool to accelerate the growth of software companies. Serial acquirer which can drive more growth out of each deal can also manage to preserve high organic growth.
Successful companies generate business momentum by executing more deals and translating each deal into more revenue growth. The robust acquisitions strategy must be built around the core business. A good mix of organic and inorganic growth will allow these companies to survive and grow in this industry.
Serial Acquirers Among Technology Companies
Aligning Acquisition Approach With Growth Strategy
Startups need support in the race of growth, reach and talent. Many of these companies won’t survive on their own and become attractive targets for large tech companies that needs to stay on the leading edge of innovation. The rationale for why both parties enter into an alliance is extremely important so that long term growth evolves correctly for both sides.
In digital acquisition, synergies can be captured in two ways which will help justify the acquisition price and rationale:
- Accelerating the target’s growth: The acquirer’s strength such as its capabilities and capital can be leveraged to create a business plan to accelerate the target’s growth.
- Access to Customers: A company can provide the startup an opportunity to access select customers to test ideas and prototypes. In some scenarios, these customers can turn out to be revenue generating customers. The acquirer can integrate the startups’ technologies into its own solution and offer joint go-to-market strategies. It also bolster the startup’s reputation in the market.
- Access to Capital: The startup gets access to capital for future expansion which will help it to navigate the fast growth phase. Apart from capital, they also get access to acquirer’s assets and business units.
- Access to Capabilities: Acquirer’s identify internal capabilities they possess that are highly valuable to startups and provide startups access to those capabilities. These directly links to the core business and the competitive edge that they create for startups can drive success for both sides.
- Access to Partner Ecosystem: The startup will get access to other startups already part of the acquiring company which will help it to source fresh ideas and feedbacks. The other startups often turn out to be its first customer. The larger ecosystem provides many opportunities for collaboration.
- Growing the acquirer’s capabilities: Acquirer can grow its core business or identify new revenue stream by leveraging target’s capabilities thus generating significant value.
Products – Gap Fill
Companies often buy and plug a piece of technology into their product roadmap rather than building it from scratch. Companies often buy an anchor ingredients in a new product area and then plug it alongside the main offering. A company may use acquisitions to strengthen in its core product or service offering.
Customers – Expansion
A company can grow by acquiring a target with an applicable customer base. This can help the company to reach new geographies and enhance the credibility of the product/ service which helps it to gain a larger market share.
Capabilities – AcquiHire
Significant competitive advantage can be gained by having the right capabilities. M&A can enhance the acquirer’s digital capabilities and core offering by securing distinctive talent. These are relatively small acquisition that will fit into acquirer’s core digital business strategy and enhance its capabilities.
Opportunity Models For The Acquisitions
There are four main models of building value in a company post-acquisition. Most growth opportunities can be mapped into four quadrants by segmenting them based on value and growth potential. The first two rationales relate to developing the acquirer’s core business while the last two relate to growing new business.
Tech companies can leverage startups to protect their core business against digital disruption. It is the stable and dependable business that the company counts on. These kind of acquisition takes great care to favor safety over growth. The rationale is to build new business models, products or services to support and protect the core business.
A transform describes the acquisition of a startup with the goal of strengthening the value that the company provides to its customer. Tech companies can transform some of its products or services by leveraging a startup’s outsider mindset and new skills. Companies need to brace themselves against the competition from other tech giants by partnering with startups and hence able to change their culture and adapt to new ways of working.
Tech companies can acquire startups to augment their product/service portfolios and grow into areas adjacent to their core business. The tech company may acquire the startup for its new service, product, or business model and integrate these offerings into its existing business. This is their entrance into an area that they intend to grow.
Tech companies can collaborate with startups to accelerate their pace in newer and upcoming business areas with high growth potential. The acquirer can optimize their business in areas such as R&D, sales and operations. It often leverages the startup innovative solution to strengthen its portfolio. The good news behind this model is that there is a clear demand for the product and services and the startup is doing well in delivering it.
The tech M&A market will only continue to heat up. The goal of tech deals is to grow the business and create more value for the customers and shareholders. Success in acquiring start-ups can be measured through metrics like employee retention, product roadmap milestones and use of IPs in the buyer’s portfolio and might not reflect as immediate profit for the buyer.
A right integration strategy will help the companies overcome the challenges and capture the benefits of a digital acquisition. Accomplishing success will take some hard work, but companies that succeed will be strongly positioned to withstand competitive pressures and market disruptions.
[Please note these are my own personal views and not necessarily those of my employer]