Insights

Private Equity and Tech Companies Face Stiff Competition From Unlikely Source for Tech Acquisitions
POSTED 5.8.19 M&A

The pool of Buyers of technology companies is getting wider. Tech companies, as well as Private Equity firms, are now facing significant competition for quality acquisition targets from an unlikely source – non-tech strategics.

In fact, traditionally non-tech companies have become the most active acquirers of tech companies.

The most recent example is the $300M purchase of Dynamic Yield, an artificial intelligence (AI) company, by McDonald’s. It’s the fast food giant’s largest acquisition in 20 years. They plan to use Dynamic’s tech in order to improve drive-thru ordering, as well as digital products like self-serve kiosks and a mobile app.

“With this acquisition, we’re expanding both our ability to increase the role technology and data will play in our future and the speed with which we’ll be able to implement our vision of creating more personalized experiences for our customers,” says McDonald’s president and CEO, Steve Easterbrook in a statement.

But this practice isn’t new. Newspaper company Gannett purchased the remaining shares of online site Cars.com for $1.8B in 2014. 

Brick-and-mortar businesses have good reasons to go on a tech buying spree. There are several drivers that explain this trend.

In the case of Gannett, the acquisition of Cars.com filled Gannett’s shrinking advertising revenue it and other traditional media outlets were losing to online advertising. Cars.com is a leading site for online research and shopping for new and used cars, which, before the internet, was the bread and butter of newspapers. It’s the perfect fit.

Other drivers for the acquisition of tech companies by non-tech strategic corporate acquirers include:

  • Creating a new framework for engaging customers
  • Increased focus on data on how they can leverage it to market more effectively to customers
  • Acquiring technology they don’t have
  • Evolving consumption and monetization models
  • Recognition that their existence is threatened if they don’t evolve
  • New channels/new distribution models
  • Recognition of the trend of disruption (if you can’t beat ‘em – buy ‘em)

I believe the most important driver is the concept that today, every company is a technology company, no matter what the industry. Technology saturates the day-to-day operations of every business.

Quoting from Wired magazine, “The essence of the value of technology companies is – people. It isn’t just the intellectual property that a technology company creates, owns, and sells; it is the people who create that intellectual property and who bring fresh thinking and fresh ideas about how to solve problems, particularly problems that relate to the customer. Ultimately, every industry will become a technology industry and every company will have to become a technology company.”

This bodes well for owners and investors of emerging tech companies. 

More Buyers increases competition for desirable targets. Add to that, non-tech strategics are willing to spend more than Financial Buyers such as Private Equity.

According to 451 Research, Strategic Buyers have paid 20% more for target companies than Financial Buyers. To avoid losing opportunities, look for Buyers from all sides to provide more aggressive terms to preempt auctions. 

One way savvy Buyers compete is to deploy Representations and Warranty Insurance (R&W) to enhance their offers. 

R&W coverage insures Buyers and Sellers from financial loss resulting from a breach of the Seller’s representations and warranties outlined in the purchase agreement.

R&W transfers the indemnity obligation away from the Seller over to an insurance company. With the indemnity risk removed, Sellers can reduce or eliminate escrow or hold-back provisions and collect more cash as closing.

Buyers benefit by enjoying the protection from a post-closing loss that can result in both a financial hit as well as the fallout from having to claw-back money from the newly added tech company principals.

In most cases, the Sellers are willing, if not eager, to cover the cost of the insurance in exchange for securing a clean exit from the deal, so Buyers benefit even further.

R&W coverage has been used routinely by Private Equity. However, Strategic Buyers are slow to engage in this useful tool.

If you’re working with a Strategic Buyer, there’s an above average chance they’ve never used R&W, so introducing the concept of transferring risk out of a deal at a modest cost would add tremendous value.

A great guide to promote an understanding of the benefits is a free report I’ve put together about how you apply for R&W coverage, the costs involved, when the topic of R&W should first be discussed, and more.

You can download it here: 8 Things You Need to Know About Representations and Warranty Insurance