Analysts and the vortex of tech M&A

It’s not possible to develop organically to keep up with the accelerating innovation that we see in the tech world
It’s not possible to develop organically to keep up with the accelerating innovation that we see in the tech world

Chapple:  Tim Miller, thank you so much for joining us today. So Tim, in your more than 14 years working at 451, you’ve continued the work of tracking the M&A market, advisory firms, that are working in technology markets. And in 451’s M&A KnowledgeBase, you’ve developed over these years an incredibly strong resource for organizations that want to understand better the key private IT merger opportunities that are unfolding in the industry. Thank you so much for joining us, and we really look forward to speaking with you today.

Duncan Chapple interviewed 451 Research’s Tim Miller about mergers and acquisitions in the tech industry. This section of discussion addressed the changes in tech M&A, and the vortex of M&A created by the reduced opportunities for organic growth.

Part 1

Miller:  Thank you. 

Chapple:  So Tim, let’s start at the high level. Is there a significant change in the way that people are talking about mergers and acquisitions and investments right now? Are people looking at it more strategically, more tactically or more continuously at what is going on in tech M&A?

Miller:  It’s a great question and what I think has happened is that we’ve reached a period of capitulation particularly by vendors but also by end users – capitulation to the idea that organic growth itself is not going to be enough. Now, we’ve always known that I suppose, but now I think that we see it in a much more real way. It’s not possible to develop organically to keep up with the accelerating innovation that we see in the tech world. I compare it to a vortex. Maybe it’s not the right image, but it’s one that resonates with me. This constantly swirling faster and faster world of tech innovation and disruption is coming sort of like a cyclone, the path of which is really difficult to predict and we’re just seeing more and more vendors large and small as well as their investment groups coming to us for data that helps them understand valuations for sure, but also what’s going on competitively. What are their competitors buying given that the lens to these companies’ strategies is no more demonstrated than in M&A activity? And also they’re looking at market intelligence. Where’s the hot money going in the industry? So I do think there’s a period of capitulation if you know what I mean by that.

Chapple:  Your vision of the vortex is reminiscent of Geoffrey Moore’s notion of being inside the tornado. You know that there are solutions that develop that are aimed at earlier doctrines that can cross over into the mainstream market. They think that they’ve won safety, but immediately they’re in a much harder and much more competitive market. Maybe there’s something there that makes M&A beneficial not just for the acquirer in a new strategic direction but also for the firm that’s being acquired on how it begets different kinds of expertise. So in a certain sense, is this a double capitulation? You know the firm that’s being sold that __ can’t grow without the support of a larger partner and also the larger partner and in a way what it has to offer the world it has its own ingenuity. But it’s ability to take solutions to market. 

Miller:  It’s interesting, a double capitulation – yeah! And I think for many startup companies given the IPO market being as sickly as it is, of course, there’s this whole world of unicorns that just keep raising round after round after round – it’s not going to end soon. However, I think many companies just understand on a private side that there’s not going to be a big IPO event, and that’s maybe not even so desirable, and that their liquidity event of choice is actually to get acquired. And I think that’s arguably a more accepted outcome now than it used to be. I think one thing we’re seeing from the acquirers particularly the vendors is because this vortex is swirling so quickly. They need to look further and further ahead to see what’s coming. Some of the companies that I’ve been speaking with have gone from looking at the startup community looking at very very very early stage companies, and that gets them to the request for data and the data-driven aspects of this that we can talk about in a little bit. They’re getting further ahead down the road because, again, it’s almost too late if you already know the companies that are pretty well-known in the industry. 

There’s another point here that’s interesting to me, and that is the way that this vortex is affecting end user companies. Big end-users of technology that are not necessarily in the tech industry. We see that in a couple of ways.

Number one: How can they leverage innovation and new technology for competitive advantage? We always used to traditionally think, oh, it’s the financial firms that can see this direct relationship between new technology and the ability to make money with faster trades or to get insight on trades and so on, but now we see this flow out into other companies as well. We’re seeing more and more non-tech companies buying into technology as everyone knows, General Electric is probably an excellent example of that. But, it’s almost that you could argue that every company is becoming a technology company. Buying whatever it is in the technology world that accelerates their own product development. 

Number two: we’re seeing drug companies not only looking at their own acquisitions but now looking at our data to see what their competitors are doing and what their competitors are buying in the technology world. That’s how far along it’s gone that they can’t even keep up with what their competitors are buying in the IT technology world. But that’s interesting. And then, of course, the market intelligence aspect as well they’re looking at where the puck is going and who is investing in what hot sectors.

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