The need to accelerate innovation is driving acquisitions from corporates across all industries
A few months into 2019 and corporates are continuing to drive a large share of M&A activity. Flush with cash following stellar earnings growth, corporates have a strong position to pursue M&A. One increasingly attractive area for corporate acquisitions is technology. But the appeal of technology assets has become more broad-based, with corporates from many different sectors chasing those targets. The data supports this trend.
According to Dealogic, from 2017 to 2018 there was a 19% increase on a global basis in the number of deals where corporates classified as outside of the technology sector made $100m+ acquisitions (majority stake and minority stake) of tech companies. This 19% increase contrasts with the more marginal uptick in the overall deal count for the $100m+ segment in the same time period and suggests that acquisitions of technology targets by companies operating outside of the technology sector are accounting for a growing share of all middle-market and large M&A deals.
In addition to the growth in the number of deals, there is also some data showing that the increased interest in these technology targets is pushing valuations higher. Looking at the same type of transactions – corporates classified as outside of the technology sector making $100m+ acquisitions of tech companies – the median EV/EBITDA multiple for these deals increased from 13.8x in 2017 to 15.3x in 2018, higher than overall M&A market multiples.
It’s easy to see why corporates of all sectors are interested in technology targets. Acquiring a technology company provides an opportunity to accelerate innovation and combat disruptive competition. Big data, artificial intelligence (AI), software-as-a-service (SaaS), collaborative robotics, 3D printing, and the internet of things (IoT) are a few of the technological trends fundamentally changing the landscape in every industry. As companies’ revenue growth and profitability are increasingly driven by technology and data analytics, their M&A strategy has broadened. McDonald’s acquisition of AI company Dynamic Yield, a provider of real-time analytics and predictive segmentation to personalize end user experience, is a recent example. By selecting the right acquisition target, companies can revolutionize and vastly improve key components of their business model, such as monitoring equipment, managing production, optimizing resource utilization and improving customer service. In short: every company, in every sector, must now be a technology company.
Baird Global Investment Banking continues to see this trend unfold as illustrated by recent deals:
- IoT for asset and resource optimization. Baird recently advised Telular Corporation on its $525 million sale to AMETEK, Inc. AMETEK is a global manufacturer of electronic instruments and electromechanical devices. The company was attracted to Telular’s software-enabled IoT solutions for logistics, tank monitoring and security applications, which drive attractive, recurring revenue along with long-term customer relationships. The combination of Telular’s IoT capabilities and AMETEK’s measurement technology provides the company with additional growth opportunities. Telular is now a part of AMETEK’s Electronic Instruments Group (EIG), a leader in advanced analytical, monitoring, testing, calibrating and display instruments with annualized sales of $3 billion.
- SaaS based online training. Baird recently advised Lobster Ink on its sale to Ecolab Inc., the global leader in water, hygiene and energy technologies and services. Lobster Ink is a leading SaaS based provider of end-to-end, online, customer training solutions for hospitality and foodservice markets. The acquisition is part of Ecolab’s investment in innovations to solve customer challenges through science, service, digital-driven training and solutions. The combination enables Ecolab to deliver high quality training content to its customers at any time, on any connected handheld device. Ecolab can now provide an intuitive SaaS platform, built for global workforces, to address its customers’ growing need to ensure proper hygiene, food safety procedures and other critical processes.
- Predictive analytics for water treatment. Kurita Water Industries Ltd., a global provider of water treatment solution products, technologies and maintenance services, recently acquired a majority stake in Fracta, Inc. Kurita, which was advised by Baird, was attracted to Fracta’s AI-driven engine for predicting water pipeline failure and maintenance needs with far greater accuracy than existing methods. Through partnerships with major utilities and data sources, Fracta’s technology accessed and analyzed volumes of data regarding existing water infrastructure and historical failures, and could identify the myriad factors likely to cause failures and allow utilities and engineering firms to “stack rank” where their preventive maintenance budgets should be spent. Through Fracta’s predictive technology, utilities and operators can dramatically reduce both maintenance spend and pipeline disruptions and failures, which translates to significant bottom line improvement in an industry with historically thin margins. Thus, Kurita saw Fracta as a very powerful addition to its arsenal of solutions for water utilities.
The proliferation of technology and its power to differentiate one company from its industry peers will continue to motivate corporate executives to pursue promising technology targets. Those buyers in pursuit are no longer limited to larger technology corporates; rather, that potential buyer pool often reflects corporates from other sectors. Consumer Packaged Goods, Pharmaceuticals, Manufacturing, Tourism and Travel – there is no sector where a competitive edge isn’t directly linked to technology in some way. As the technologies become more powerful – more enabling for business models – this relationship will only become more solidified.For more information, contact a member of our Global Technology & Services Team or Global Mergers & Acquisitions team.