Apprehensive over inferior mobile and online platforms, inefficient processes and frightful visions of becoming irrelevant, both tech and non-tech organizations are looking to leapfrog the innovation curve by acquiring proficiency in A.I., robotics, predictive analytics, machine learning, blockchain, natural language processing, image recognition software and the Internet of Things (IoT).
“You can look across literally every industry out there today and see both old-guard companies and new age businesses acquiring tech startups, from auto companies buying autonomous vehicle software providers to retailers buying e-commerce portals,” says Jason Flegel, partner and leader of Deloitte’s technology, media and telecom M&A practice. “Unequivocally, this is a major M&A trend with real lasting power.”
A recent survey conducted by Chief Executive with Tata Consultancy Services found 72 percent of CEO respondents considering either a merger, acquisition or divestiture in the next three years. Top drivers include new products or services, new markets and new business models. Since 2010, more than 21,800 tech startup exits—or points at which investors like VCs sell their stakes in a firm—have been tracked worldwide, representing a total deal value of about $1.2 trillion.
“Large technology companies have acquired smaller tech companies for years, but what is really eye-opening is the extraordinary number of non-tech companies closing deals,” says Marc Suidan, leader of PwC’s technology, media and telecom deals practice.
The result? Sky-high valuations, of course. Elvir Causevic, managing director and co-head of global investment bank Houlihan Lokey’s Tech+IPadvisory practice, says some of the leading tech startups that come to the firm to represent their sale “are seeing very high valuations in the market relative to historical multiples and expect the same for their own deals, especially if they have the best-in-class technology.”
He’s not kidding. 3-D printer maker Desktop Metal, for instance, took 1.79 years from founding to reach $1 billion, whereas autonomous driving startup Zoox took two and one-half years. Electronic scooter maker Bird jumped from a $400 million valuation to $1.2 billion in under three months.
Further clouding the picture is the tightening debt market. Cheap debt and ample private equity fueled the run in M&A. With rates rising and recent instability in the equity markets, the window for funding is narrowing and not every midsize buyer will be able to buy what it wants.
Luckily, there are other ways to round out your transformations. “Assuming the board and senior management identify what they need and why, they can generally get it in a joint venture or partnership, a licensing deal, or by poaching technology skill sets,” says Robert Hartwig, a professor of finance at the University of South Carolina’s Darla Moore School of Business. “M&A is not the only path toward digital and data transformation.”
Here are three examples of such alternatives, which serve as a prudent counterbalance to risky M&A transactions.
A License to License
Like many midsized companies, W.L. Gore & Associates must compete against larger business entities to acquire innovative startups. The 60-year-old global materials science company is circumventing this obstacle by licensing the patent for a groundbreaking technology.
Gore is primarily known for its GORE-TEX waterproof, breathable fabric membrane, but it also creates medical devices and products for the aerospace, pharmaceutical and mobile electronics industries. While it pursues traditional acquisitions, joint ventures and venture capital investments as part of its external growth strategy, the company also engages in novel patent licensing deals.
“Startups in the medical device space are very high-priced right now relative to historical multiples,” says Paul Fischer, who leads Gore’s corporate development organization. “We’re challenged in acquiring these organizations by larger publicly traded companies that can use their equity to purchase these companies. We need to deploy other creative strategies.”
By licensing an inventor’s patent on a breakthrough technology, Gore avoids the typical pitfalls of an acquisition, chief among them the cultural integration issues. The license also can be exploited to serve different needs. “We can use it to make things, but we can also use it to prevent others from making things,” Fischer says.
With regard to this defensive use, he explains that by owning the patent for a period of time, Gore can block a competitor from moving forward with a new product using the particular technology in its market space, or thwart the aims of a potential market entrant planning to do the same thing. “Patent licensing has become a large piece of our overall growth strategy,” says Fischer.
The drawbacks are relatively minor. While most patents can be licensed on a 20-year basis, some may require specific use restrictions. “Most times you can license it for whatever you want to use it for, but not always,” says Fischer. Another issue is whether the license provides exclusive use or non-exclusive use of the patent. In the latter case, other companies can also license the patent, limiting its effectiveness as a market barrier. “Universities that develop technologies that accept government research funding can’t provide exclusive licenses,” Fischer notes.
Still, there is more for CEOs to gain than lose from considering patent licensing as a means toward digital and data transformation. While a patent creates an effective market barrier, no company should license a patent it doesn’t expect to actually use.
“Thomas Jefferson opined that inventors of a patent should be incentivized for the betterment of society,” Fischer says. “If you keep it in the drawer, you’re squandering its value.”
Invest, Learn and Buy (Maybe)
Long disparaged as technology laggards, insurance companies are transforming operations from top to bottom using a variety of innovative digital and data technologies. In cases where these tools are not built in-house, they’re obtained from the more than 1,500 insurance technology startups that have sprouted like mushrooms over the past 10 years.
These nimble InsurTech startups seek to either compete against traditional insurers, sell to them, or be acquired by them. For insurers that opt to buy a startup, one way to lessen the risk of a failed deal is to invest in the company first, by way of forging a close partnership. This is the strategy of American Family Insurance (AmFam), a large, 90-year-old mutual insurance company providing property, casualty, health and life insurance products.