In recent years some very big brands outside the tech space have been stepping in to acquire technology companies as the pressure to keep up with consumer-powered digital trends touches more industries, from automobile makers to traditional retailers.
And with a new U.S. president in office, there are signs M&A activity could accelerate further this year, given Trump’s talk of torching business regulation to encourage more deal-making.
TechCrunch talked to John Stiffler, senior M&A director at business and technology consulting firm West Monroe Partners, to get his take.
What sorts of clients does West Monroe Partners work with on M&As?
Stiffler: On the M&A side we help both private equity and corporate strategics in the middle market space buy and sell really pretty much any type of business from an industry perspective but the big three where we spend most of our time would be manufacturing & distribution, healthcare and high tech.
High tech could be anything from businesses that have products in the cloud, platform as a service, or infrastructure as a service. Or something that might be a little bit more mainstream, in terms of shrunk-wrapped software, that kind of thing.
That’s macro level. We do probably 300, 350 transactions or so a year, both for private equity and strategics. We represent probably about 30 to 35 per cent of the firm’s revenue. The rest of the firm’s revenue comes from things outside M&A.
What are the factors you see encouraging non-tech companies to acquire startups?
Stiffler: The tech space is such a competitive space, generally speaking, and in some of the stuff that we’ve seen is it’s a little bit of plugging technology gaps that the large corporation, mid-market facing or frankly even larger than that, just can’t build on its own quickly enough.
The point is that if I’ve got the need to compete with an Amazon, for example, how do I do that without having to go hire my own tech team? Start up my own application platform etc. Maybe I can buy some of that and supplement my team, or in fact maybe just completely buy it and integrate in.
One of the examples would be last year… on the Wal-Mart side there was a good acquisition, if you will: Jet. Wal-Mart wanted to be able to compete with Amazon. Instead of actually trying to crank out their own set of applications they just bought Jet.
So the premise is that as tech services are becoming so much more prevalent and dominant for consumers, there’s more of an urgency for the non-tech players to be getting into this space in a big way — which is then driving more M&A activity?
Stiffler: Yes, well said.
Do you have any data to quantify growth in this type of M&A activity?
Stiffler: I don’t have any specific data… A lot of it really is just based on what we see. As I said, 65 per cent of our business comes from things outside of M&A and oftentimes we’re consulting for these businesses that are considering how to get better in terms of competition. And in many cases it shows up as ‘hey why don’t we just wait to buy technology assets’. And so because we don’t track that, per se, I don’t have any specific metrics.
Are there particular tech areas of special interest to the sectors your firm focuses on for M&A?
Stiffler: Generally this whole idea of getting technology into a space where you can reach the consumer more rapidly or that you can provide a service that’s easier for the user/customer to use is key. The Wal-Mart acquisition of Jet is one.
Interesting stuff too. If you look at Ford, GM, they’re buying all kinds of things like that again. And in some cases in the automobile industry it’s how do I stay concurrent with the consumer of the automobile such that they want to have all these technology based component in their vehicle as well as how they manage their vehicle. So you buy a car today, you can get access to the car via the web. You can do all kinds of good things like that. Big, behemoth companies like that don’t necessary have some of those capabilities built in. So a lot of it is to be more relevant to the consumer. To be first to market so to speak with certain technologies that the consumer might want, and so on. That’s generally driving a lot of it.
A lot of it also that we’ve seen is just general operational efficiencies. So take the consumer/end-user out of it, how do we become more efficient as a business in the technology space, such that we can replace aging systems that cost a tremendous amount of money to maintain. Or for that matter we don’t have the right resources to really maintain those systems anymore, so we need to get into more mainstream technologies. So it’s all the legacy based stuff as well, that comes into play here.
Have you heard of any deals in play where a non-tech firm is really eyeing up a tech company?
Stiffler: Nothing that I could probably speak to with any authority at this point. There are inklings of certain things that are out there — but nothing that would be, I guess, quotable.
There have been Disney-Netflix M&A rumors for a while now…
Stiffler: Yeah… That [rumor] comes to mind, of course. There’s some interesting things.
How do you see the Trump administration affecting M&A activity?
Stiffler: If you look at some of the regulatory/other things that might happen as a result of Trump jumping into office, there’s going to be some interesting play from that.
He’s been pro-biz for all of his campaign. He did oppose the AT&T-Time Warner merger. There’s probably a good deal of optimism that he’s probably going to relax a bit on his stance, all round, allowing these kinds of things to happen. So the pro-stance and the Department of Justice and some of the antitrust things that they were looking at under Obama I think we’ll see… that under that pro-business stance, large-scale deals will likely become more feasible. That’s generally speaking what the industry might be saying.
And what we’re hearing from some of our private equity investors who are looking at buying and merging businesses — now this obviously isn’t a corporation, these are private businesses, or businesses going from public to private, there’s not as much regulation if you will in that — but we see those guys being more bullish on opportunities to take advantage of that. So the punchline is I think it’s going to be an easier time for large corporations to do some of the things that may have been difficult over the last eight years. I think we’ll see a little more activity in the private sector as a result of just a very favorable deal climate.
So faster deal-making if Trump is removing barriers for business. But might there not be concerns down the line of problems emerging later, i.e. due to a lack of due diligence as regulations are pared back?
Stiffler: I haven’t heard that. In the conversations that I’ve had with my private equity clients, there’s just been a lot of healthy optimism about what things will look like this year. I haven’t heard that there’ll be some push back this year.
What might Trump’s moves towards deregulation do for tech company valuations — might they be pushed up?
Stiffler: There’s so many things that are driving tech company valuations up, there are just so many opportunities with some of the businesses that are available, or not available and are hot commodities for people to pursue, but some of those have to do with generally just the market, the industry at large if you will. But I think if we look at his relaxing certain regulatory based things, if the markets continue to do well financially, if the lending climate continues to be strong, with low interest rates and he puts pressure in that space to continue to keep the economy humming, you’re going to see the deals stuff continue quite robust.
Because with the strong credit market, and rates low, and debt readily available, you’ll continue to see lots of really, really good activities. In the meantime corporate strategics still have a tremendous amount of cash and they need to put it to work, and what you’ll see is those businesses will continue to put upward pressure on deal valuations because they usually… don’t have the short term issues of needing to buy and sell such that they can return values to shareholders immediately — like private equity looks like — they can actually hold onto businesses indefinitely, so they can actually spend a little bit more, typically, than the private equity client can so they’ll drive up deal valuations as well.
So there are some signs that there might be more acceleration for tech valuation this year?
Stiffler: I would say so. All the things that we see and hear, and some of the stuff that I’ve read… is saying that for sure. But we’re certainly seeing it in the market, at least at this point.
What are your general M&A predictions for this year across the sectors you work in?
Stiffler: I think that in the healthcare space we’re going to continue to see a tremendous amount of activity, it’s still so fragmented from a tech perspective. I talk about things all the way from clinical trial management, where there’s just such a mess of fragmentation in that space, and people that can bring together some really interesting capabilities for the pharma-based businesses probably will have first mover advantage, so I think that there’s going to be a lot of work in the healthcare space. Not just clinical, but if you look at taking a number of smaller businesses that might be regional practices, like some kind of a provider model, and bringing that into more of a national practice, the whole thing around what may or may not happen to Obamacare may have an effect on some of the things that folks are doing but generally speaking I think healthcare’s going to be very robust.
There’s going to be quite a bit of effort in the high tech space. A lot of the Silicon Valley based companies and companies like that will continue to be very, very busy on the acquisition side, I think, just because of the volatility and the need to accelerate. So I think it’s a healthy outlook for those two spaces. Manufacturing and distribution will continue to bump along but the first two I expect to see quite a bit of work in that space.
This interview has been lightly edited and condensed for clarity