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Increase of Mergers and Acquisitions in the tech industry

ICICIdirect 9 Mins 03 Jun 2024

In one of our previous articles, we have covered Mergers and Acquisitions (M&A). It was a generic discussion. Today, our focus is on M&A in the technology industry. Spend five minutes on this article if M&A in the tech industry is of interest.

What is M&A and why is it done?

Mergers and Acquisitions (M&A) refer to the processes through which companies consolidate their assets, operations, and management structures. It can involve the merging of two companies into one entity (merger) or one company purchasing another (acquisition). M&A is a significant aspect of corporate strategy, corporate finance, and management dealing with buying, selling, dividing, and combining different companies.

Now, why does M&A happen? The list of reasons is long but below we try to cover some top reasons:

  • Growth: Companies pursue M&A to expand their market presence, grow their customer base, and achieve economies of scale. For example, a local company merges with a national company to gain a nationwide presence.
  • Synergy: To achieve synergy, where the combined company is more valuable than the sum of the individual companies due to cost reductions, increased revenue opportunities, or improved efficiencies. A manufacturing company acquires a supplier to reduce production costs and improve supply chain efficiency.
  • Diversification: To diversify their product lines or enter new markets, thereby reducing risk. A tech company acquires a software company to diversify its offerings beyond hardware.
  • Increase Market Share: To increase market share by reducing competition or entering new markets. A telecom company acquires a smaller competitor to increase its customer base and market share.
  • Elimination of Competition: To eliminate competitors, gain a competitive edge, or consolidate market power. A large retailer acquires a smaller competitor to reduce competition and gain market dominance.

Reasons why tech industry go for M&As

Now that you have understood the generic scenario, let us shift focus to tech industries. Here are some reasons why tech industries go for M&A:

Accelerated Innovation:  Staying ahead of the technological curve is crucial for tech companies. Acquisitions can be a shortcut to acquiring cutting-edge technology, talent, and intellectual property (IP) that would take years to develop organically. It allows them to bring new products and services to market faster and maintain a competitive advantage.

Expanded Market Presence:  By merging with or acquiring a company with a strong presence in a new market or customer segment, tech companies can broaden their reach significantly. It can be particularly attractive for companies looking to expand geographically or enter new markets altogether.

Enhanced Competitive Advantage: M&A can be a way to consolidate resources and expertise, giving a company a stronger position against competitors. It might involve acquiring a direct competitor to eliminate them or gaining access to their technology or customer base.

Cost Efficiency: Sometimes, it's cheaper to acquire a company with certain functionalities or resources than to develop them in-house. Merging operations or eliminating redundancies can lead to cost savings and improved efficiency.

Talent Acquisition: Highly skilled tech talent is a precious resource. Acquiring a company with a strong team can be a strategic way to attract and retain top performers, boosting the overall talent pool and expertise within the organization.

Access to New Data: Data is the lifeblood of many tech companies. M&A can provide access to valuable new datasets, which can be used for product development, customer insights, and improving targeting and marketing strategies.

M&As in the tech industry in recent years

Here are some of the M&A from the tech industry:

Nazara Tech's 13 acquisitions: In the last five years, the tech-gaming company has made 13 acquisitions, three of which have come in the last 2 years. The company has also said that it is setting aside about Rs 830 crore, or $100 million for acquisitions over the next two years.

Infosys recent acquisitions: Infosys acquired InSemi, a Bengaluru-based company that specializes in semiconductor design and embedded services, for Rs 280 crore. This strategic move strengthens Infosys' presence in the Engineering R&D services sector and positions them to play a bigger role in the semiconductor ecosystem.

Microsoft-Activision Blizzard: It was a massive deal announced in January 2022 for a value of $68.7 billion. Microsoft acquired Activision Blizzard, a leading video game developer and publisher, boasting popular franchises like Call of Duty, World of Warcraft, and Candy Crush. With this, Microsoft aimed to become a major player in the gaming industry and compete with Sony and Tencent. Activision Blizzard's extensive gaming portfolio and loyal fanbase were key attractions.

NVIDIA’s Acquisition of ARM Holdings (2020): NVIDIA announced the acquisition of ARM Holdings for $40 billion, aiming to combine ARM's extensive ecosystem of chips and technology with NVIDIA's expertise in artificial intelligence and graphics processing. The merger is expected to create a powerhouse in the semiconductor industry.

Salesforce’s Acquisition of Slack (2020): Salesforce acquired Slack for $27.7 billion to enhance its enterprise communication tools and better compete with Microsoft Teams. The integration of Slack with Salesforce's customer relationship management (CRM) platform aims to create a unified platform for business communication and collaboration.

Future of the tech industry

Without a second thought, the future of the tech industry is bright as the industry is brimming with exciting possibilities. However, there are a few challenges also. Here are a few technologies/areas to look forward to:

  • Accelerated AI Integration: Artificial intelligence (AI) is poised to become even more pervasive, transforming various aspects of our lives. We can expect advancements in areas like Machine Learning (ML) and Generative AI.
  • Rise of the Metaverse: The concept of a virtual world where users can interact, work, and play is gaining traction. The metaverse has the potential to revolutionize sectors like social interaction, education, and even work environments.
  • Quantum Computing: While still in its early stages, quantum computing holds immense potential for tackling complex problems beyond the reach of traditional computers. It could lead to breakthroughs in materials science, drug discovery, and financial modeling.

Overall, the future of the tech industry is a dynamic one. Staying informed about these trends and their potential implications will be key for businesses, policymakers, and individuals alike to navigate this ever-evolving landscape.

Before you go

The surge in M&A activity within the tech industry is a testament to the sector's dynamic nature and the relentless pursuit of growth, innovation, and strategic advantage. As technology continues to evolve, M&A will likely remain a crucial tool for companies to navigate the complexities of the market, drive innovation, and achieve sustainable growth.

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