Innovation-driven M&A: explorers, enablers and expanders
December 2017 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
December 2017 Issue
Innovation drives many mergers and acquisitions (M&A). A matter of risk and reward, M&A deal makers balance the growth potential of innovation – be it patents, products or capabilities – with the possibility of rapid and unforeseen obsolescence.
That said, overall it is a burgeoning environment. Indeed, Deloitte’s ‘Fuelling growth through innovation’ report notes a “sharp and continuous increase in M&A deals done with the primary purpose of acquiring capabilities or technologies across key disruptive innovation categories, including FinTech, artificial intelligence (AI) and robotics”.
According to the report, innovation-driven deals saw a total value of $291bn last year, more than four times the $72bn seen in 2012.
Innovation at the core
“Innovation is at the core of most M&A transactions,” says Greg Fincke, director in the market intelligence and operations team at Equiteq. “In the knowledge-led services sector, we typically think of innovative companies in three buckets: explorers, enablers and expanders. Explorers are on the cutting-edge of innovation and are pushing the boundaries in areas like augmented reality (AR), virtual reality (VR), the Internet of Things (IoT) and AI. Enablers are setting the groundwork for the next big innovations in spaces like data analytics and business intelligence (BI). Expanders build on, implement or integrate existing innovative technology.”
Of these three categories, Mr Fincke notes that the highest volume of innovation-driven M&A tends to be focused on enablers and explorers, due to few companies having the ability and the risk appetite to acquire the explorers.
Jonathan Klonowski, EMEA research editor at Mergermarket, agrees that innovation has long been, and will continue to be, one of the key M&A drivers. “The next wave of technological advancement will influence each sector and companies that do not readily evolve or adapt will struggle to compete,” he suggests. “First mover advantage is crucial in order to exploit what groundbreaking technologies such as AI and IoT have to offer. One way in which firms can achieve this is through M&A.”
Innovation in practice
Among recent, high-profile innovation-driven M&A deals is the $15bn takeover by Intel of autonomous car developer Mobileye – a transaction which, according to Mergermarket data, saw just less than a 35 percent premium on the previous day’s share price and 41.9x revenue.
Another deal that made a splash was Vantiv’s €10.2bn acquisition of Worldpay, one of the biggest of Q3 2017 and the largest announced in Europe over the last three months. “Many expected Worldpay to look at takeovers of its own in a bid to consolidate its position, but the post-referendum drop in sterling left it vulnerable to foreign investors – of which Vantiv came out victorious,” says Mr Klonowski. “The world of payments looks set to see further consolidation in the coming years and this deal has been noted as a possible catalyst for future deals.”
The acquisition of the ‘innovation consultancy’ Gravitytank by Salesforce also served to reinforce the importance of innovation-driven M&A in the quest for business growth. “This deal is fascinating as it potentially transforms Salesforce, which was itself already innovative, into a firm that enables its customers to become innovators,” observes Mr Fincke.
One sector seeing a number of multi-billion dollar investments is cab-hailing, exemplified by SoftBank’s investment into Grab, Didi Chuxing, Ola and 99. The conglomerate is also rumoured to have an interest in Uber.
M&A spend on innovation has been considerable over the last 12 months and shows no signs of slowing. On the contrary, a host of consumer offerings are constantly emerging to give companies new avenues for exploration and investment.
“Whether it is explorers, enablers or expanders, it is highly competitive for acquirers of innovative firms,” contends Mr Fincke. “Looking at expanders, historically this space has seen rising deal volumes and values in the Salesforce and Workday ecosystems, as those platforms gained traction within the Fortune 2000. As those platforms matured, deal volumes and values plateaued or declined. However, new technologies have emerged. We are about to see a surge of deal volumes and valuations in the cloud computing space.” As a testament to this, in October 2017, ServiceNow acquired design firm Telepathy.
For many, the inevitable future is one that consists of more companies shifting toward buying innovative businesses and concepts rather than developing those products and services themselves.
“Accessing market share comes much quicker for companies that acquire rather than those that build through research and development, where considerably more money and time is spent developing new ideas,” suggests Mr Klonowski. “New technologies and disruptive technology will be among the most important trends to watch in 2018 and onwards, and will drive deal making. One of the key emerging trends will be the encroachment of technology firms into non-traditional sectors to exploit their knowledge and innovation within underdeveloped sectors.”
With growth the number one priority for companies, M&A, especially innovation-driven deals, is likely to continue leveraging its status as a prime mechanism for executing that growth.
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