Tomorrow’s deal dynamics: How technology investment opportunities are reshaping M&A

The COVID-19 pandemic and recession are forcing 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 during the downturn, as they could outperform competitors. Some companies that acquired technology during previous recessions have differentiated capabilities and improved efficiency, emerging stronger. Others have disrupted markets through innovative products and services, enhancing their offering to customers.

In a PwC survey of business leaders, 63% said the technologies of the Fourth Industrial Revolution (4IR) provide protection against an economic downturn. There’s ample reason for this belief: During the recession from late 2007 to mid-2009, 40% of emerging tech acquirers outperformed their sectors, a PwC analysis found.

Future gains are possible with tech investment in business models, product offerings, customer experience, or operations and capabilities. In the current environment — which features significant disruption but also substantial available capital — the question isn’t whether to invest. It’s how and where. Which areas promise the most transformative investment opportunities, and at what price? But acquirers need to take care. Even with some potential targets in a delicate financial state, multiples may be high. Deal structure will matter, as will execution. But on the whole, dealmakers have seen this movie before, and those who are bolder with tech investments are looking forward to the sequel.

Where the opportunities are greatest

With some early startups hurting for capital, the pandemic has created two distinct opportunities for 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.

Cloud

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 with an increased return to physical offices as COVID-19 vaccines become more available, much of the shift to remote work likely will endure, expanding M&A 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.

Virtual reality

With extensive travel, large events and group meetings still likely to be limited during the vaccine rollout and afterward, 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 in favor of an effective substitute for visiting a remote location in real time.

Robotics

With a focus on safety joining the quest for efficiency, 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.

Drones

Advances in unmanned aerial vehicle (UAV) technology will 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.

3D printing

Between the COVID-19 pandemic and strained relations between the US and other nations, supply chain uncertainty 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.

Execution still matters

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 an efficient operation, you will gain greater efficiency. But if you combine automation with an inefficient operation, you will merely get greater inefficiency. 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 values carries minimal value.

Given the high valuations for many businesses — despite the recession — and the substantial amount of capital chasing assets, buyers need to 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:

High valuations present challenges to acquirers, but the right asset in the right hands ultimately could produce solid long-term returns. Some businesses previously bought for what some analysts believed at the time was a significant premium have turned out to be winners due to their truly transformational nature and their related focus on value creation. Take, for example, Disney’s 2017 purchase of Bamtech, which ultimately helped enable the Disney+ video streaming service.

Confirm your core is strong to start

Transformation may be an immediate strategic imperative or a long-term aspiration, but core businesses should be on solid ground first. During an economic downturn, consider technologies likely to enhance your core before exploring areas where expansion into adjacent sectors would be possible and profitable.

Understand tech cycles

Consider how emerging technologies, including 5G-enabled services, will 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.

Consider your own scale

Large or serial acquirers often assume that even if they overpay, damage will be limited because they enjoy scale and change management expertise. 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 need to be careful not to be swamped by an acquisition. A large bet on transformation shouldn’t jeopardize the future of the core business.

Recognize that “buy versus build” isn’t a binary choice anymore

With many company valuations still 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 don’t 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.

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Colin Wittmer

Colin Wittmer

Deals Leader, PwC US

James Marshall

James Marshall

Deals Research and Insights Leader, PwC US

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