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Artificial intelligence and M&A: Are you getting the value you paid for?

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Summary

  • Artificial intelligence and machine learning play an increasing role in society.
  • AI can help improve productivity and performance. 
  • Acquiring AI can help companies quickly develop expertise, but they must know what they’re buying.
  • Companies should understand how AI relates to accountability and ethics.
  • After a deal closes, companies need an integration plan to help preserve the transaction’s value.

Emerging no more: As demand for AI surges, investors face more questions critical to capturing value

In just a few years, artificial intelligence (AI) has gone from an emerging technology to an essential one. AI companies raised a record $33 billion in equity funding in 2020, according to CB Insights data, and businesses that identify as AI extend beyond the tech sector. Many companies involved in more than 870 AI-related mergers, acquisitions and public offerings between 2016 and 2020 were in industries such as transportation, aerospace, healthcare, biotech, electronics and advertising, a PwC analysis of CB Insights data found.

In addition, more companies aspire to be “AI first,” upgrading their data infrastructure and adopting new formats for sourcing and storing data. They’re increasingly relying on AI models for everything from monitoring performance to developing ethical guidance that complies with new regulations.

But this increased interest raises new questions:

  • Do buyers understand exactly what capabilities they’re getting?
  • Do buyers have an effective process in place to evaluate and leverage the technology?
  • Do buyers, especially those outside the tech sector, really know how to assess the value of a potential AI acquisition?

Before considering an AI deal, acquirers and other investors need to be clear on the rationale and have a rigorous process for evaluating the transaction. Anything less could limit the odds of turning AI’s potential into reality.

Increase revenue and profits

According to PwC’s 2021 AI predictions survey of US business and technology executives, most of today’s biggest tech companies are accelerating their embrace of AI. A quarter of the companies surveyed reported widespread adoption, compared with 18% a year earlier.

Many believe AI will improve productivity and enable them to operate more efficiently. In addition, they see the technology as improving the customer experience, enhancing cost savings and improving internal decision-making. AI systems capabilities continue to grow, broadening their appeal. For example, AI can now generate text, audio and images that most humans can’t distinguish from original material, and this will have a variety of applications in business messaging, customer service and training. 

 

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Intent of investment

Whether companies intend to acquire talent, data or analytics, AI investments tend to fall into one of the following five categories:

Long-term bet

The buyer and target join forces to conduct long-term research into new AI applications aimed to accelerate growth of the overall business. Such deals include Google-DeepMind, Intel-Moovit, Microsoft-Lobe, Microsoft-Softomotive, Oracle-DataFox, Workday-Stories.bi and Amazon-Zoox.

Platform play

Buyer acquires virtual reality or other platforms to integrate and enhance existing AI capabilities, as demonstrated in transactions such as Facebook-Oculus, Snap-AI Factory, ServiceNow-Element AI, Apple-FlyBy Media and Amazon-Body Labs.

Core offering

Buyer aims to enhance its product offering with specific technology that could be a market mover for them. Examples include NVIDIA-Mellanox, ServiceNow-Loom Systems, Cisco-ThousandEyes, Palo Alto Networks-Aporeto, Juniper Networks-Mist, Avalara-Indix and Amazon-Kiva.

Talent acquisition

Buyer acquires target for its AI talent or intellectual property developed through AI, as evident in such deals as Apple-Init.ai and ServiceNow-Element AI. Industry continues to appeal to graduating PhDs in AI, attracting 65% in 2019 compared with 44% in 2010. Companies are scrambling to find skilled talent needed to meet production goals. 

Analytics

Buyer acquires target for its analytics capabilities, such as in Microsoft- ADRM Software, Apple-Turi, Apple-Laserlike, Google-API.ai, Google-Terraform Labs, SAP-Qualtrics, Salesforce-Datorama, Facebook-GrocStyle Salesforce-Tableau and Accenture-Byte.

Before jumping into a deal, acquirers need to evaluate these transactions through a different lens, or else their investments won’t generate the value they expect. Deals involving AI aren’t always what they appear to be. According to a 2019 MMC Ventures study of more than 2,000 European AI startups, 40% were found to have no AI at all.

Because the nuances of AI can make each transaction unique, dealmakers should carefully evaluate the technology and the target before proceeding. Moreover, integration plans should consider responsible AI principles and practices to ensure a deal’s value continues long after it closes.

 

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Buyer beware: What exactly are you acquiring?

Buying AI capabilities rather than building them in-house has advantages, but only if companies can navigate the challenges. For example, companies that acquire AI technologies can deploy them in the market faster, but they may have less flexibility in designing a system tailored for their products or services. Acquiring AI also can help companies develop technical expertise quickly and avoid depending on third-party vendors for critical tools. 

However, these benefits should be carefully weighed against the cost of the deal and potential pitfalls, such as culture gaps between acquirer and target, a lack of customization of the existing technology and the risk that the technology doesn’t perform as promised.

Understanding the capabilities and ensuring the proper evaluation methods are in place is particularly critical for non-tech companies aiming to enhance operational efficiency. How, for example, does a food service company determine whether a specific technology can improve order fulfillment? 

Evaluate M&A from different angles

Should you buy an AI company?

Dealmakers need to think strategically and ask: Why is an AI company worth buying? What business problem will the technology solve? 

Depending on a company’s business strategy, the reasons for acquiring AI capabilities commonly include:

  • To acquire innovative technology, such as breakthrough algorithms
  • To access proprietary data that’s unavailable or inaccessible through licensing
  • To leverage talent that is difficult to grow or attract organically

Making a successful deal

For a deal to succeed, companies need a rigorous method for evaluating the transaction. The process should include input from financial experts, product managers, data scientists and technologists who can assess whether the target’s AI capabilities will be able to perform as promised. These diverse perspectives can evaluate deals from different angles and address questions such as:

  • Technology: Do buyers have adequate technical infrastructure to support the acquisition?
  • Talent: Do employees, separate from data scientists, have the necessary skills to operate the new technology?
  • Product strategy: Will the acquired AI system or machine learning algorithm perform the same in its target environment if, for instance, the customer segment, geography or other variables change?
  • Data: Can the target’s data, which powers the AI technology, evolve and improve over time?

Assessing AI companies: Adopt an integrated due diligence approach

AI doesn’t work without the right data, but targets often overstate the accessibility and uniqueness of these assets. Product managers, data scientists and technologists can contribute to commercial diligence efforts by assessing how the data compares with that of competitors.

This level of collaboration can pay off in big ways. For example, one tech company that acquired an AI-based cybersecurity company found that the target’s technology wasn’t as differentiated as it would have been a few years earlier. The buyer uncovered the shortcoming through an integrated diligence process, with the product technology and commercial diligence teams working together to interview customers and evaluate the commercial and competitive aspects of the target.

Responsible AI: Where dealmakers can extract value

Companies should consider responsible AI in determining if a transaction will reach its optimal value. This starts with an integration plan that accounts for the technology’s evolving sophistication. A plan should not only outline when and how the assets and operations of an acquirer and target would combine, but also cover how the new company will respond to regulations and social standards likely to shape the future of AI.

 

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How to achieve responsible AI

The rise of AI raises inherent issues about trust and accountability to customers, governments and other stakeholders. For example, what happens if your AI makes decisions that are systematically unfair to certain groups? Numerous studies have found that AI can contain racial, gender and disability biases. The technology may be called artificial intelligence, but it still depends on people to write the algorithms, choose the data the algorithms use and apply the results. 

Companies acquiring AI capabilities need an integrated governance system to mitigate these risks and identify potential biases before they can contaminate results. Here are some principles and practices of responsible AI that companies should consider:

Ethics and regulations

Dealmakers should coordinate with the acquirer’s and target’s compliance departments and other stakeholders to address existing and developing regulations. Take, for instance, privacy laws. As an acquirer and target combine key data that powers the AI, they must assess whether the systems comply with Europe’s General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA) and other relevant privacy laws. If not, the acquirer, target or both should consider anonymizing data or taking other steps to mitigate noncompliance issues. In addition to existing legislation, acquirers should also examine the Institute of Electrical and Electronics Engineers’ (IEEE) and European Commission’s respective guidance on AI ethics.

Robustness and security

AI systems need to be secure and safe. The value of a deal involving AI often hinges on the notion that the data being acquired has not been tampered with and is protected. As a result, dealmakers should evaluate how vulnerable a target’s AI systems are to cyber attacks and whether proper controls are in place.This starts with involving chief information security officers in the deal early on, so security experts can help a deal team understand potential synergies with the target environment. Risks differ depending on the industry. Companies should evaluate these risks as well as the potential financial, operational and reputational impact. 

Interpretability and accountability

At some point, a company may need to explain why a particular AI model reached a particular decision. Dealmakers should rely on the target’s management, data scientists and others with knowledge of the models to address this question and tailor the explanation to different stakeholders, including regulators, business sponsors and consumers. Doing so inspires confidence among employees and consumers in the AI technology acquired and can further protect the acquisition’s value. Acquiring companies should ensure the AI they buy is not a black box and can be re-created and understood by either their own data scientists or external experts.

Bias and fairness

Bias, such as gender discrimination in hiring, is one of the biggest risks associated with AI. Bias can show up in data sets that train algorithms either because the data does not represent reality or it reflects existing prejudices. Say AI powers a company’s internal employee recruiting tool, and the algorithm was trained on historical hiring decisions that favored men over women. Chances are the recruiting tool will likely do the same. To reduce such risks, it’s critical for dealmakers to consider plans to tune AI systems to mitigate bias and ensure that decisions adhere to the company’s corporate code of ethics, as well as anti-discrimination regulations. Companies also should continually test for bias in data, models and human use of algorithms.

Traditional controls probably aren’t sufficient to detect the problems that can cause AI bias. Companies should pay particular attention to historical data and data from third parties. Also, data managers should be on the lookout for proxies — biased correlations that can creep into data sets, such as ZIP codes that may correlate to race, or synthetic data that’s created to fill gaps in data sets.

Finally, companies should diversify their teams. Bias is often a matter of perspective, and people from different backgrounds can offer differing views that can help root out bias in the data.

 

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Bottom line

Before considering a transaction, dealmakers need to evaluate the deal's rationale by asking:

Why buy an AI company?

If dealmakers decide to buy, they will need to assess the risks and make sure they’re buying what they think they’re buying. This means rethinking the deal process by taking the following steps:

  • Assemble diverse expertise to evaluate the deal, forming a team of financial experts, product managers, technologists, data scientists and others who can assess the AI target from different angles.
  • Examine the technical infrastructure and necessary skills to operate the new technology.
  • Assess whether the data powering the AI technology can evolve and improve over time.
  • Evaluate whether the acquired AI system or machine learning algorithms can be applied to the acquirer’s unique business model, customer base or other features.

What problems could an AI acquisition solve?

Once the deal closes, the work must continue to preserve the transaction’s optimal value. Start early by developing a comprehensive integration plan that includes the following:

  • Operationalize: Evaluate the human role of AI and decide how employees will help operate and manage the technology.
  • Apply responsible AI: Develop a framework that will address how managers and employees will follow ethics and regulations, adopt proper security and safeguard against bias.
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Marc Suidan

Principal, Global TMT M&A Consulting Leader, San Jose, PwC US

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Anand Rao

Global AI Lead; US Innovation Lead, Emerging Technology Group, Boston, PwC US

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