A relentless parade of new technologies is unfolding on many fronts – one of which includes the M&A scene. While not every emerging technology will alter a business’ landscape, certain technologies have the potential to disrupt the status quo, alter the way companies operate and rearrange value pools. These “disruptive technologies” can quickly displace established systems and set new industry standards.
As an example, earlier this year, Toronto-Dominion Bank made headlines for its acquisition of “Layer 6 AI”, a start-up company which uses artificial intelligence to analyze various forms of data and anticipate an individual customer’s needs. This announcement came shortly after TD’s investment in the KAI Banking Chatbot. The Chatbot will be integrated into TD’s mobile banking app. Much like in the banking sector, as the pace of technologically-driven change continues to accelerate, companies across all industries will need to consider how to position themselves in response to the increasingly disruptive tech ecosystem. More often than not, the solution involves the acquisition of tech-driven or digital business models which can allow companies to close the innovation gap by obtaining certain capabilities or products.
According to a recent report published by PWC, such activity is expected to become part of a larger trend involving M&A in the tech sector. Specifically, tech-related M&A is expected to surge in 2018, with both deal volume and valuations rising over the next year. Similar to TD’s acquisition of Layer 6, it is predicted that non-tech companies will continue to seek out opportunities to purchase disruptive technology as a value creation strategy and/or a defensive tactic. Such deals can add value to a company’s platform in various ways, including:
- access to highly skilled teams;
- use of new technology or intellectual property;
- entrance into new markets; and
- increased cross-sell / up-sell opportunities.
The value drivers listed above can also be critical for companies striving to remain competitive against tech companies and other disruptive entrants. This is often a necessity in order to avoid being rendered obsolete by new market entrants that are causing profound shifts in value chains and customer behaviours. In addition, investment in disruptive tech can be a significant factor in a company’s ability to liquidate or consider exit strategies. As always, value is relative and will depend on the existing players in the market; however, where companies are generally unable to align themselves with technology, they will likely be unable to secure an optimal exit, or even worse, attract a buyer’s attention. Statistics show that one out of every five transactions has a clear link to some form of technology, and the value of these deals as a percentage of the overall market is even greater.
While it will be important to monitor this trend in the months to come, it will be interesting to see whether companies that are in pursuit of growth or simply looking to manage disruptive technologies also find themselves venturing into new markets and part of a new competitive race.
The author would like to thank Joseph Palmieri, Articling Student, for his assistance in preparing this legal update.
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