PwC Predicts Uptick in International M&A Activity, Cloud-Driven Deals

Don Tennant
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Top Predictions for Enterprise IT in 2014

Mergers and acquisitions in the technology sector will accelerate in 2014 to keep pace with change driven by disruptive technologies, according to a report released last month by PwC.

The report, “Analysis and Trends in U.S. Technology M&A Activity 2014,” cited a continued strong focus on software deals in particular, to foster innovation in the areas of cloud, mobility and big data analytics. I recently discussed the report with Rob Fisher, PwC’s U.S. technology deals leader, and I asked him where hardware companies fit into the M&A picture, especially in the cloud context. He said it depends on which hardware vendors, and which categories:

But clearly, hardware companies, just like software companies, are facing a potentially significant shift in their customer base, as well as in their business model, as their devices are moved more into public and private cloud, vs. selling directly to end users or to enterprise customers. I think that disruption certainly could create disruption within the vendors, and cause even further consolidation. The hardware group, as a whole, is actually fairly consolidated. But we’re also seeing new entrants coming out that are competing in different segments of that industry, based on more of a cloud-based business model.


Fisher noted that a key driver of M&A activity, for hardware and software companies alike, is the quest for innovation:

I think most technology companies use M&A as a means to augment their organic R&D, and I think that’s true of hardware companies, as well as software companies. The one fundamental that underlies the entire industry is innovation. And it’s very difficult for any company to be able to cover all potential areas of innovation, while also maintaining and improving their existing products, which is where most of the R&D spending goes within the companies. So they’re constantly keeping an eye out for, and even looking to acquire, companies that are being funded by VCs to create new and innovative products.

I found it interesting that PwC is also predicting an increase in cross-border technology deal activity, fueled largely by equity buyers looking more to emerging markets for higher growth and returns. I asked Fisher to what extent U.S. companies are looking to acquire technology that’s advancing more rapidly in other markets than it is in the United States. His response:

The types of deals we see, that are cross-border, more of them involve consolidation, vs. the acquisition of startup technologies. But there are certainly exceptions to that, with respect to certain countries and to certain categories. In particular, Asia tends to be a leader in a lot of online and mobile services and games, and tends to be an innovator. And then there are certain countries that tend to be perennially very strong innovators and builders of entrepreneurial companies. One in particular that we very frequently see, that has a lot of stellar technology companies, is Israel.

I asked Fisher to what extent cross-border technology deal activity is being carried out by U.S. companies as a means of gaining a stronger presence in other markets. He indicated that that doesn’t tend to be much of a driver anymore:

In my experience, it very much depends on the sector within the technology industry that you’re talking about. A lot of the pure technology companies—hardware, software, semiconductor companies, and the like—tend to be global. They produce their product where they produce it, and they’re able to distribute those products globally, to one extent or another, generally without a lot of restrictions. … With the more product-oriented companies, especially on the enterprise side, it seems to be more about acquiring technology. Sometimes there’s pure consolidation; there might be some customer base there, too. But generally speaking, it doesn’t seem to be so much about getting into a market, as it is about acquiring capability in a technology.

 



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