One business trend that will likely gain significant strength in the coming years is technology-driven M&A. These are acquisitions or joint ventures whose fundamental purpose is to create or protect firm value through the acquisition of technology. While the search for technology has always been an M&A strategy, its importance has grown as the pace of technological development has accelerated, the use of technology in our lives has increased and technological disruption of industries has become more common.
Technology-driven M&A transactions have, as with all M&A strategies, potential advantages and disadvantages. On the one hand, they can help companies jump often lengthy innovation curves, rapidly expand into new business areas and maximize the sales potential of products and services. On the other hand, acquiring technology can be very expensive, implementing technology can be challenging and there can be significant uncertainties as to the impact of technology on a business and whether the acquired technology will remain relevant and competitive in the face of other technological developments and market changes.
This article briefly discusses the increasing pace of technological development, provides an overview of three models of technology-driven M&A and looks at some advantages and disadvantages of tech-driven M&A strategies.
The Accelerating Pace of Technological Development
While technological development is by no means a new phenomenon, arguably we are witnessing the greatest acceleration of technological progress and impact of technology on human lives in history. There are four related reasons for this which have combined to create a virtuous cycle of technological progress.
● Increased Dissemination of Technological Knowledge. Information about technology and technological development is being disseminated at increasingly rapid rates. Due primarily to the Internet and the explosion of knowledge-sharing economies, it is possible to learn about technological developments, discover how to replicate them and work on ways to improve them faster than ever before. The Internet has gone a long way to convert the world into an open technological laboratory.
● Improving Technological Development Finance and Economics. Investment in technology has rapidly increased due to growing global wealth, deeper and more efficient capital markets and the increasing interface between investment capital and technology development. This has been combined with the falling cost of many key building blocks of technological development, such as human labor, access to information, computer-driven research and the cost of technology development-enabling devices such as computers.
● Increased Use of Technology. The use of technology in our daily lives has increased. Due to increased Internet penetration rates, the Internet of Things and trends such as technology convergence, our lives are increasingly intertwined with devices, such as cell phones, which rapidly evolve. This has increased technology absorption rates.
● Economic Conversion of Technology. Due to increased knowledge about technology demand and immediate access to large amounts of technology users through the Internet, the chances of converting technological development into short-term financial gain have improved. This has created the rise of companies such as Google, who channel large amounts of resources into technology research and technology ventures. The shrinking loop of technology development and economic conversion creates strong incentives for the constant push for new technological applications.
Three Types of Technology-Driven M&A Strategies
The rapid pace of technological development has had a major impact on businesses and how businesses view the path to value creation. As an M&A strategy, the acquisition of the right technology can allow a business to grow at rates that can be significantly in excess of growth strategies that rely on other growth drivers.
There are three key types of technology-driven M&A transactions.
● The first type of technology-driven M&A strategy is used by businesses who are looking to acquire innovation to defend their current business model, strengthen elements of their business or transition into new business areas. One example of this strategy is where a petroleum company seeks to acquire a company with renewable energy technology.
● The second type of technology-driven M&A strategy is utilized by technology companies who have technology at different stages of development but who not have the necessary resources to complete the technological development or who do not have a platform to monetize the technology. This strategy can allow technology companies to shorten product launch cycles, significantly expand their access to potential customers and greatly accelerate their ability to deliver their products and services to those customers.
● The third type of technology-driven M&A strategy is used by financially-driven investors who attempt to use technology to create financial value consistent with their overall investment strategy. Technology can be used with every type of financial M&A strategy, ranging from turnaround strategies to long-term value growth to risk arbitrage.
Advantages and Disadvantages of Technology-Driven M&A Strategies
Technology-driven M&A strategies have advantages and disadvantages. At the company level, the key advantage is the right technology can significantly improve business performance. This, is and of itself, can create a series of positive developments, including increased productivity, profitability and investment.
A second key advantage of technology-driven M&A strategies is that they externalize different parts of the technology development and commercialization phases, which can create overall economic efficiencies. For an industrial group, it can be economically efficient for a large portion of technology development to be carried out by third parties. Similarly, for a technology firm, it can be economically efficient for other parties to develop and maintain the channels necessary to market technology.
On the other hand, technology-driven M&A strategies can pose several challenges. To begin with, acquired technology may not fit precisely with a company’s business model or may be difficult to implement, which can create operational inefficiencies as well as efficiencies.
Second, even if technology fits precisely with a company’s business model and can be readily implemented, technology may become obsolete or markets may shift toward different technological applications, eliminating the benefits of the technology acquired.
Thirdly, because of the uncertainties involved with the integration, implementation and durability of technology, it is extremely challenging to value. Unlike investment funds who might hedge the risks of technological investment by investing in many technology ventures, for a single company a major technological investment may constitute a significant bet of its available business development capital. Furthermore, given the uncertainties of technology investments, financing parties may only underwrite investment in technology at significantly higher costs than more secure CAPEX or other investments, which can put firms under financial pressure, particularly if it will take a long time for technology-driven benefits to be realized.
As the pace of technological development and the integration of technology in our daily lives continues to accelerate, technology-driven M&A will become an increasingly relevant M&A strategy. While this strategy has advantages and disadvantages, it should be carefully considered by companies looking to maximize the potential of their business model and drive overall firm growth.
This article was written by Darin Bifani.