The COVID-19 pandemic has forced companies to revise assumptions for production, labor, supply chains and other elements critical for growth. That means reassessing deal strategies, and business leaders have the opportunity to accelerate digital transformation by investing in technology, as they could outperform competitors. Some companies that acquired technology during past economic volatility have differentiated capabilities and improved cost effectiveness, emerging stronger. Others have disrupted markets through innovative products and services, enhancing their offering to customers.
Future gains are possible with tech investment in business models, product offerings, customer experience or operations and capabilities. In the current environment — which features disruption but also available capital — the question isn’t whether to invest. It’s how and where. Which areas have the most transformative investment opportunities, and at what price? But acquirers should take care. Even with some potential targets in a delicate financial state, multiples may still be high. Deal structure will matter, as will execution, in the current M&A market.
With some early startups hurting for capital, the pandemic created two distinct opportunities for M&A technology investment: capabilities and products. Emerging and mature technologies can be found in both categories.
Investments in capabilities often involve incremental innovations that contribute gradual, continuous improvements on existing products and services — with an impact on improved operations and margins. Technologies such as automation, artificial intelligence (AI) and the Internet of Things (IoT) continue to win greater acceptance in businesses and help drive down costs. They’re often viewed as essential elements of digital transformation — using cloud and AI to enhance remote work, for example, or allowing for greater social distancing and contactless interactions through robotics, predictive maintenance, advanced analytics and robotic process automation.
Product-based deals have greater potential to either include a radical breakthrough that transforms an industry or disrupt existing markets, with a differentiated offering and a significant impact on future revenues. These can take various forms and involve combinations of technologies — some of which have seen much less investment to date than AI and IoT — that revise assumptions for production, labor, supply chain and retail. For instance, digital twins integrate IoT and AI, while “extended reality” uses virtual reality (VR), augmented reality (AR) and AI to blend the physical and digital worlds.
Already a leading tech in investment value, cloud computing is expected to be leveraged by more businesses in many industries as a foundation for new business models, better customer experiences and new ways of working. Even as workers have returned to physical offices, much of the shift to remote work will likely endure, expanding M&A innovations and other investment possibilities in higher education, entertainment and various professional services. Increased 5G investments also could drive greater connectivity and improved network speeds for bandwidth-intensive applications such as video conferencing and gaming.
Even as travel has resumed, VR could increasingly bring people together for immersive experiences, team collaboration and training and other “feels like being there” occasions. And investment opportunities aren’t limited to groups, as some businesses consider forgoing long, expensive trips for an individual executive in favor of an effective substitute for visiting a remote location in real time.
With a focus on safety joining the quest for cost effectiveness, companies are increasingly deploying robots for deliveries and transportation in manufacturing, distribution and healthcare — the last including patient meal deliveries and medication shipments. Robots also are being used to sterilize and disinfect high-traffic areas. From maintenance to IT to workforce, this shift could alter due diligence and valuation of some assets by both buyers and sellers.
Advances in unmanned aerial vehicle (UAV) technology will likely accelerate as companies in many industries assess how they can help with deliveries, surveillance and monitoring, inspections and other functions. While an era of drones flooding the sky still may be far off, greater investment in manned and autonomous UAV businesses is likely — not only in technology but such sectors as agriculture, construction, security and emergency services.
Between the pandemic and strained relations between the US and other nations, supply chain issues could lead some businesses to explore 3D printing to offset parts shortages and other issues. Investing in 3D printing also can increase customization opportunities — either within company operations or in response to customer demands.
Tech investment isn’t plug-and-play. It requires guidance and close management. There’s a compounding effect to execution, whether good or bad. As Microsoft’s Bill Gates has said, if you combine automation with a cost effective operation, you will gain greater returns. But if you combine automation with an ineffective operation, you will merely get greater ineffectiveness. And on the offering side, while “digital” is the word of the day, technology that doesn’t deliver a product or an experience that a customer wants carries minimal value.
Given the substantial amount of capital chasing assets, buyers should consider multiple avenues to achieve the technological innovation boost they seek. Joint ventures, strategic alliances and other co-investment tactics could offer their own advantages over a full purchase.
Companies should approach deal and investment opportunities with the following in mind:
Transformation may be an immediate strategic imperative or a long-term aspiration, but core businesses should be on solid ground first. Consider technologies likely to enhance your core before exploring areas where expansion into adjacent sectors would be possible and profitable.
Consider how emerging technologies, including 5G-enabled services, will likely evolve and advance over the next decade. Investing now, regardless of macroeconomic conditions, may be essential to ride the next technological wave — wherever it takes you.
Large or serial acquirers often assume that even if they overpay, damage will be limited because they enjoy scale and change management specialization. But paying too much for an asset or paying too little attention after it’s acquired can be destructive, and that can be compounded by a strategy of serial acquisitions. By the same token, small acquirers should be careful not to be swamped by an acquisition. A large bet on transformation shouldn’t jeopardize the future of the core business.
With many company valuations still relatively high, “settling” for a lesser asset instead of overpaying for a hot name could work, provided it will still do the job. The fact is, once you buy any business, you’re probably getting some things in a deal that you may not want. The higher price for an A-plus target still may generate solid returns with the right execution. But money saved by acquiring a B-minus asset can be used to develop it into an A-plus down the road.