The 'buy it rather than build it' approach that's driving business innovation
The strategy behind the acquisitions made by the billion-dollar tech companies Facebook, Google and Apple are increasingly used by mid-market businesses to become more competitive.
The adoption of a 'buy it rather than build it' approach is the reason the acquisition of technology - and often the technologists themselves - has become more frequent.
M&A deals like this are a major driver of innovation and represent a growing portion of Australian M&A transactions.
Acquiring technology reduces risk
While the Federal Government has provided several initiatives (such as the R&D tax incentive) to encourage internal innovation, developing this new capacity still comes at a cost. Research and development activities consume considerable time and resources in businesses that don't generally have it as a core focus, and of course
OECD research has confirmed that smaller firms usually struggle to get the necessary funding, talent pool and technology to drive internal innovation.
Businesses searching for a technological edge often face a choice. If you're looking to build it yourself, you have the risk of whether you can attract the talent required into your incumbent business, to build what is effectively a technology start-up.
On the one hand, businesses can choose to invest years in research and development, hoping to build a product or process that meets their needs. On the other, they can seek out a smaller business that already has something that fits their requirements or is part-way there.
Businesses are measuring the time it takes to hire the right talent and are concerned about the risk that they might not get it right, the first time.
Many businesses are wary of the chance that research and development, budget blowouts, and sluggish product development timelines could all contribute to a product that doesn't do the job - or is easily surpassed by their competitors.
M&A with another brand, platform or service is often a less painstaking process. The deal can usually be done within six months and many technologies come with an existing customer base and a strong track record.
Tech giants look to M&A to become more competitive
This new tech identify-and-acquire model is driving an increase in M&A activity around the globe.
Apple acquired a specialist app developer to give us Siri, and Google expanded its artificial intelligence (AI) advantage with the purchase of AI-powered gaming specialist DeepMind Technologies. More recently, Facebook acquired photo-sharing technology by buying Instagram and private messaging via rolling up WhatsApp.
Closer to home, ASX-listed business WiseTech Global is a logistics software company that has made an incredible 24 acquisitions since July 2017. In recent transactions, they have acquired a specialist cargo terminal management software developer, a real-time messaging provider and a group that develops customs management software.
Many of these have been aimed at building up its software features rather than focusing solely on geographic expansion.
There's a lot of incumbent businesses out there now who are finding other businesses that are more technologically advanced, and are rolling them in.
So, while it might look like two peers coming together, sometimes the strategic rationale is about catching up and getting ahead.
Think about the big picture and your long-term vision
Both acquirers and targets need to think about the bigger picture, Sonego explained. For smaller, developing businesses, that involves increasing the value you can bring to possible acquirers.
You might only be a small business generating, let's say, AU$5m profit, but if another company can use your technology and it improves their business by 10 per cent and they are an AU$500m profit company, that's an extra AU$50m you have delivered for them to the bottom line.
Similarly, if you're an acquirer, your M&A strategy should always be built on your business strategy.
Businesses must ask themselves what is it that their business needs, where is the business going, and therefore, what acquisition will get them there?
Cultural alignment is crucial
According to Sonego, there is one vital and intangible factor that always needs to be considered when businesses come together: culture.
Cultural alignment is critical in any M&A transaction, regardless of the industry.
Businesses who are wary of a cultural mishmash sometimes opt to structure the acquisition by keeping the two parts separate, as an add-on or a service provider.
Bolder businesses may be able to successfully fold their acquisition into their existing model, but it usually takes a concerted effort internally to revolutionise the business, going forward.
If you merge businesses, you can risk taking away what was unique. If you just drop that into a bureaucratic incumbent business, often you can lose a key part of the business you bought.
Corporate finance specialists can work closely with their clients to fast-track their deals, maximise wealth and achieve their vision for technological mergers and acquisitions.
Michael Sonego is a Corporate Finance partner at Pitcher Partners' Melbourne firm.