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How evolving markets are shaping the next tech deals

28 March, 2019

Marc Suidan
Technology, Media and Telecommunications Deals Leader, PwC US

Why do some tech companies grow a lot faster than others?

I recently raised this question in an article for strategy+business. By observing the trajectory of some of today’s most high-growth tech firms, such as Google and Amazon, it’s evident that these companies don’t just dominate existing markets. They actually create new ones, using M&A to assemble critical elements that help generate new revenue and exceptional growth.

For companies to be tech market makers, they need to start thinking differently about the future of business. Futurist and author Tim O’Reilly discussed this need last year at the PwC Deals Exchange, where he encouraged dealmakers to shed long-held beliefs on what makes companies successful and offered advice on how to capture growth in an increasingly technologically sophisticated world.

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Think networks, not companies

The smartest deals anticipate how markets and industries will evolve in the future. If dealmakers want to understand the future of business, they need to evaluate companies through a new lens as the prevalence of social networks influence virtually every industry.

Gone are the days when firms operate as stand-alone companies. Increasingly, they’ve become network platforms that directly connect buyers with sellers, leaving out the inefficiencies and costs of middlemen. Take for instance Amazon, which has created a vast marketplace for third-party sellers able to deliver next day.

Network platforms will shape the future of business and the broader economy, and it will be crucial for dealmakers to understand how they work and how they will impact broader industries as they assess which investments will drive growth.

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Algorithms now run the “free” market

US innovation has long thrived on the assumption that economies are usually better off if we just let them be. But algorithmic technologies are quickly outdating what we know about the “free market.” Increasingly, sophisticated computer calculations are influencing, if not upending, nearly every industry.

Algorithms curate the content visible to us and influence how companies market and sell their products and services, although not all content is accurate or fair — further complicating how businesses operate and market to consumers.

This doesn’t mean technology will replace humans. Tech will create new markets and opportunities, which is worth bearing in mind as investors evaluate potential deals and assess how they can grow in the coming years. Algorithms are still learning from the everyday actions of humans, but they will increasingly shape virtually all corners of business – from the products and services we buy to the content we see.

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Don’t just build an app, join the competition

Advances in tech have created unprecedented opportunities to form new and sophisticated markets. Companies can’t simply add an app to get ahead, which is essentially how the taxi industry responded to the growth of on-demand transportation services. Drivers quickly realized that most cities couldn’t replicate those platforms’ 24/7 supply of on-demand drivers.

The lesson here: As companies look to get into the latest big thing, they should join the competition rather than try to beat them at their game. As O’Reilly noted, taxi companies could create an app and try to compete in the increasingly competitive game of ride-hailing services or they can take a step back and find new ways to operate with them. This is where partnerships could make sense in cases where both sides can benefit from each other – whether it be technological know-how, scale, brand recognition or other assets in high demand.

Looking ahead

If we look at the latest M&A trends, it’s clear that the sophistication of technology has driven many companies to reinvent old business models: In 2018, about 40 percent of tech company acquisitions were by companies in other industries, led by consumer, media and telecommunications, and finance, according to a PwC analysis of Thomson Reuters data. This trend will likely continue, and it’s up to dealmakers to rethink what makes a good deal and how different kinds of transactions can lead the way in creating new markets.

Learn more about technological disruption and deals in the New Deal Frontier.