Innovation drive fuelling M&A appetite and corporate venturing

15 May 2017 6 min. read

Consumer demand, technological development and cross-border encroachment remain key trends, inducing incumbents to innovate their various propositions or face the prospect of disruption. In a bid to stay relevant, corporate strategy is increasingly turning to acquiring innovation, supporting it financially through corporate venture capitalism, and/or entering into collaborations.

M&A activity has in recent years hit new highs, as private equity firms seek to exit stock built up prior to the financial crisis, while continuing to pick up bargains, and corporates seek to leverage relatively cheap cash to grow inorganically – as organic growth becomes increasingly difficult to realise.

In a new report from Deloitte, the accountancy and consultancy firm explores current trends in the M&A arena, with particular focus on M&A as a means of picking up innovation. The report, titled ‘Deloitte M&A Index: Fueling Growth Through Innovation’, is based on a range of data sets including: macroeconomic and key market indicators, funding and liquidity conditions, company fundamentals and valuations.

Global M&A deal volumes vs uncertainty

The research finds that the final two quarters of 2016 were relatively lacklustre in terms of M&A deal volume, relative the same quarters a year previous. The lower level of deal activity followed a particularly strong level of activity during 2015 and into the beginning of 2016.

The firm notes that there is correlation, an inverse relation, between decreases in deal activity and a high global economic policy uncertainty index score. During the financial crisis for instance, the uncertainty score was well correlated, with a similar correlation identified in the final quarters of 2016. The most recent uncertainties stem from policy uncertainty caused by Brexit and the US elections.

Innovation focused M&A, CVC and collaboration

While uncertainty reigns from changes to the wider geopolitical environment, the research identifies a number of ways the use of M&A as a business strategy is changing. In recent years, the development of new technologies is, in some instances, radically and disruptively transforming past business models, products and services – which has, among others, resulted in increased concern among incumbent firms that risk being eclipsed by proprietary technology from startups, incumbents and tech firms.

Aside from the rapid development of new technologies, consumer sentiment / behaviour and convergence across sectors, are too creating disruptive ripples. Tech companies, for instance, are increasingly seeking to leverage their customer base, and implicit trust, to enter the payments industry or develop their own autonomous vehicle offerings.

While buying out tech companies as a whole is not on the cards, incumbents within a range of industries are leveraging a number of strategies to remain relevant and to transform / disrupt their own operation to out manouvre competitors, wether within or external to the industry. One of the means for acquiring innovation is through M&A, whereby a company can directly acquire innovation and talent. Another form of access to technologies, as well as entrepreneurial talent, is through corporate venturing and collaboration – the former sees a company invest in promising startups, while the latter involves a partnership agreement.

Disruptive innovation related M&A activity

The use of M&A as part of a wider strategy to acquire innovative technologies has been on the rise in recent years – up from around $75 billion in deal value in 2012 to close to $300 billion last year. The increase has been focused across a range of technologies, from IoT to robotics and digital, with considerable sums invested in acquiring technologies and expertise in various segments – the digital and social segments, for instance, saw $43 billion in acquisitions during 2016.

Number of CVCs and deal volume and value

Aside from directly acquiring companies, executives have also turned to leveraging corporate venture capitalism (CVC) to support startups. The trend has, in recent years, been on the rise – up from around 200 active CVCs in 2007 to almost 350 CVCs in 2015. The number of CVCs dipped slightly last year, although remained close to the record of the previous year.

The research notes that vehicles through which CVCs are investing have been changing in recent years, with increased use of co-investing, between incumbents or cross-border, to create market wide propositions or platforms, as well as more run of the mill investment in startups with strong, market relevant and scaleable propositions.

In total CVC funding hit 35% of the total $35 billion pie, while the number of deals remains somewhat more subdued – accounting for 14% of the 1,177 deals made in the VC segment last year.

M&A and CVC for FinTech sector

One area that has continued to draw considerable attention is FinTech startups. These startups, given the large sums of money that circulate in the financial services industry, have considerable potential to bring about radical disruption. Technologies like blockchain, have the potential to create considerable benefits for transparency and cross-border payments, with the institution that wins out likely to make large amounts of profit.

The segment has seen around $12.5 billion in investment during 2016, with the largest share ($7.1 billion) going towards M&A deals, while CVCs saw $2.8 billion in deals. M&A predominantly (52%) were from technology acquires, while financial services firms took the second largest share at 35%.

While financial services firms are less active than tech firms in acquisitions, they are much more active in terms of CVC, at 46% of the 174 deals last year – whose total value stood at $5.4 billion. Technology firms came second, at 14% of deals, while media and telecom come third and fourth at 13% and 11% respectively.