After a slower year in 2017, tech M&A is bouncing back. So far in 2018, we’ve seen major deals, such as AT&T acquiring Time Warner for a reported $85.4 billion and the merger of T-Mobile and Sprint in a $26 billion deal.
While these multi-billion dollar deals between tech giants make the headlines, there is more going on under the radar. The majority of M&A in the tech sector consists of bigger companies acquiring much smaller ones. For example, Bonsai, a small AI startup, was recently acquired by Microsoft. These are the really interesting deals because they point the way to what is currently motivating the big names in tech, as well as the direction that technology is travelling in.
A fight for survival
No one wants to be this year’s Blockbuster Video or Toys R Us, closing their stores because they failed to adapt to the internet age. The legend that Blockbuster had a chance to buy Netflix in 2000 for $50 million, but turned it down, is the ultimate cautionary business tale. The tech giants are learning from history.
What makes smaller tech companies, scaleups and startups so enticing is their inherent capacity for innovation, something the giants just don’t have anymore. It’s easier for smaller companies to be innovative because they don’t have to run every idea past a huge number of people. Smaller companies can be nimble. They can take risks. They can make mistakes without it being a disaster. Large tech companies have a C-Suite full of executives who demand to have their say, institutional shareholders to answer to, vast numbers of staff that have to be managed through change.
However, what smaller tech companies don’t have are large amounts of money, big marketing budgets and a receptive customer base. It’s the giants who have all of those things. This is where the synergy lies, why it’s beneficial to everyone for the big companies to take the smaller ones under their wing.
As much as big companies are buying smaller ones so they can innovate and survive, smaller companies are looking for funding to grow, or to be acquired. The venture capitalists that support the small companies want them to get bought up as soon as possible, so they can recoup their investment before the next big thing comes along. Both sides have realised that they need each other and it leads to a rise in M&A.
Economy and infrastructure
Another reason behind the resurgence of tech M&A is the economic situation. Interest rates are low, which means financing deals is cheaper. For companies that need to borrow to expand, there has never been a better time. Some economists believe cuts to corporation tax in the US could fuel further spending if tech giants bring their cash back to America from offshore territories.
Private equity firms have large reserves of cash, which has tempted them into the M&A market. In 2017, 26% of all tech M&A transactions involved private equity. This trend is expected to continue in 2018 and beyond.
A final reason for the rise in tech M&A activity is improvements to infrastructure. More of the world is connected to high-speed internet every day. 5G mobile is coming, going live in big US cities in 2019. This will mean people and businesses will do more with mobile devices than ever before. If there is another tech boom coming, large companies and investors want to be in on the ground floor. Now is the time for companies to make sure they are in the best place to capitalise.
By looking at the kind of companies tech giants are acquiring, you can see the types of technology that will become mainstream in the near future. They’re interested in companies innovating in AI, machine learning, the blockchain, big data, IoT and cloud-based solutions. There is also the race to be the first to bring autonomous vehicles to critical mass.
When the unrestricted thinking and agility of a startup or small tech company combine with the power, budget and customer base of a tech giant, innovation happens on a large scale. M&A is on the rise in the tech sector and it will help the world realise what is possible through technology.
Jo Goodson is managing director of Hampleton Partners and a tech entrepreneur.
Over the past 25 years, Jo has founded, led, advised and invested in tech companies – shaping them into industry disruptors in the internet, gaming software and entertainment sectors.
She now provides the leadership and structure that enables Hampleton’s dealmakers and their teams execute multi-million-pound transactions for their clients across borders worldwide.