Disruptive technology and its impact on the M&A landscape
by Roxanna Valayathum and Nicholas Gangiah
If, a decade ago, someone had told you that you'd be comfortable sharing your location with a stranger, hopping into that stranger's car and trusting them to take you where you wanted to go, you never would have believed them.
Fast-forward to present day and most of us use Uber without any qualms. The taxi and rental-car markets aren’t the only industries that have undergone an overhaul. Disruptive technologies such as artificial intelligence, augmented and virtual reality, blockchain, and 3D printing are rapidly changing our economy and the status quo, forcing companies to change their business approach for fear of losing their market share or becoming irrelevant.
Amazon is another example of a company that dramatically changed the game, creating an e-commerce platform which has up-ended the retail industry, introducing consumers to a new, more convenient way to shop. The use of e-commerce platforms enables retailers such as Superbalist, Takealot, Zando and Yuppiechef to offer significantly lower prices than traditional retail competitors, as they don’t have to maintain the large overhead costs of renting massive retail space or employing a huge number of sales staff. This has allowed start-ups with limited resources to successfully challenge larger well-established businesses by finding overlooked target markets in order to gain market share.
DealMakers - 2019 Annual
So how does disruptive technology impact the M&A landscape? A 2019 report by Deloitte, titled Disruptive M&A: Are you ready to define your future? states that with the current rate of change occurring in various industries, many companies are struggling to transform their business models fast enough to keep up with evolving industry standards. Many businesses do not have the necessary internal resources or capabilities to generate the levels of innovation required to keep up. It hardly helps that most companies are already struggling to meet or exceed growth expectations due to difficult economic and socio-economic factors.
Well-established companies are turning to disruptive technologies to address the various issues that they are facing, such as technology shifts, changes in consumer behaviour and cross-sector convergences. As their very survival is dependent on their ability to serve evolving customer demands, and create business models for the future, industries digitise and converge. Fast, flexible and strategic, disruptive technology has the ability to rapidly transform the acquirer's business to enable it to keep up with market standards, and to redefine how its business will operate in the future. A company’s ability to successfully exploit disruptive technologies will become critical to its longevity and profitability, given the rapid rate of change in the commercial environment.
The primary purpose for the acquisition of disruptive technology is not only the financial returns it can yield but, more importantly, the access it can provide to new capabilities, highly-skilled teams, and operating models which assist companies in closing the innovation gap, and exploring untapped markets.
An example of a typical disruptive M&A deal was the acquisition by US tobacco firm, Altria, of a 35% stake in vape manufacturer Juul, and a 45% stake in marijuana company Cronos. This deal allowed Altria to hedge its bets on the future of nicotine, as cigarette smoking has been on the decline worldwide. This decline has been attributed to the rise in the use of e-cigarettes by smokers, and the legalisation of the recreational use of marijuana in certain parts of the world. By acquiring an interest in both Juul and Cronos, Altria has changed the scope of their business to enable it to keep up with market trends and the demands of their target market.
Globally, there is increased focus on disruptive M&A as a strategy, which has seen non-technology companies overtaking technology companies as the largest acquirer of tech firms worldwide, in a bid to help them stay relevant and to stay ahead of the latest technological advances. During the course of 2019, Vodacom announced their acquisition of a 51% stake in South African internet of things (IoT) start-up, IoT.nxt, with the aim of significantly accelerating Vodacom's IoT strategy and transforming its dedicated IoT business unit. At the time of the acquisition, Vodacom said that it is looking to expand its enterprise business and, as such, is looking to form strategic partnerships with companies to deliver integrated solutions such as IoT offerings.
Additionally, disruptive technology provides for collaborative structures like joint ventures, partnerships and venture capital opportunities. These collaborative structures assist companies to test the waters with less risk, allowing them to better understand the disruptive technology before making a substantial investment. These collaborative structures also help companies to unlock rapid growth rates which are fuelled by innovation, in order to transform businesses, and to keep up to date with market trends.
In the 2019 edition of the PwC CEO Survey, 40% of executives worldwide stated that their companies are planning a new collaborative structure or joint venture in the next year, with the aim of driving revenue growth. This follows the global trend which has seen the rise of joint ventures in recent years.
These collaborative structures allow for business models which are enabled by technology that solves real problems, and which can add value in existing, well-performing industries. A prime example of this type of structure is the introduction to the market of logistics company, Pargo. As many South Africans experience challenges getting packages delivered to their doorstep, whether in townships, rural areas or estates, Pargo was developed to address these issues. Pargo solves these challenges by allowing people to send and receive goods at nationwide pick-up points, at different stores throughout the country.
Pargo has disrupted the postal industry, effectively competing with the South African Postal Service and courier companies. The service offered by Pargo has seen it partner up with various e-commerce platforms to assist with the delivery of goods ordered by customers nationwide, by having a wider delivery radius and being more cost effective than traditional courier companies.
To stay ahead, companies need to consider which technological shifts are likely to impact their business, identify opportunities in those spaces to differentiate them from competitors and then determine which opportunities warrant investment, acquisition or collaboration. The acquisition of disruptive technology is thus inherently complex as it requires the assessment and evaluation of a broader range of possibilities and targets than a traditional M&A transaction. This is largely due to the fact that the way these companies – technology start-ups with unproven track records but potentially high-value intellectual property – are valued is completely different to valuing an established, mature business.
To be at the forefront of innovation-led growth, companies need to consider shifts in technology and consumer behaviour. As set out in the Deloitte 2019 report quoted earlier, there are three M&A strategies for companies to consider in this regard:
1 invest in new growth and technological opportunities through venture financing opportunities;
2 cross-sector convergence through joint ventures to collaborate with different industries to design and develop new market offerings; or
3 the acquisition of resources, talent and different technologies, to assist the company in unlocking new sources of growth and revenue.
With disruptive technology radically altering the landscape of various industries, companies will need to draw the balance between making manageable investments that further their understanding of, and experimentation with, disruptive technology and over-extending their businesses.
Valayathum is a Director and Gangiah an Associate, Corporate and Commercial practice, Cliffe Dekker Hofmeyr.