M&A Prediction: IoT Will Continue to Drive Activity in 2015

The Consumer Electronics Show (CES) in Las Vegas is always a good predictor of future trends and market drivers, and sometimes a good indicator of merger and acquisition (M&A) activity to come.  Internet of Things (IoT) now has its time on the stage, as a significant focus of this year's show is on IoT devices.  There are smart fitness devices, home appliances, thermostats, alarms, and much more. 

As processors become smaller in size, higher in performance, and lower in power, this has enabled all kinds of devices to be connected to the Internet either via WiFi, Bluetooth, or other means that were not cost effective just a few short years ago.  This trend has created almost endless opportunities for innovation not seen since the early days of the Internet.

With this new trend and the market hype in IoT surrounding it, the M&A deals have followed.  Google set the pace in early 2014 with its $3.2 billion acquisition of smart thermostat maker NEST.  Samsung followed up last summer with its acquisition of IoT technology maker SmartThings for approximately $200 million.  Currently, buyers are discretely looking for the next big acquisition to fuel future growth in the IoT space.

Most attractive IoT Targets in 2015

2015 is shaping up to be another strong year for both technology M&A and more specifically in the IoT sector.  Sometimes, however, it is difficult to separate the hype from the facts.  The question is, given the attention being paid to the growing IoT market, what kinds of acquisitions are buyers really looking for?

The short answer is that we will see strong M&A activity where the most money is to be made in the next few years.  Ultimately, some segments of the IoT will be more profitable than others, and those are going to be the most attractive targets for M&A.  Frequently that means software.  For every supply chain of semiconductors, embedded software, and electronics hardware, there is an ecosystem that sits on top of it.  Often times the ecosystem of the hardware and device software are fairly standard and commoditized, but there is money to be made on top of the ecosystem.  The biggest profit potential of IoT may not be in the things themselves but in the data that they can provide.  Examples include:

  • Advertising – This is probably the most obvious, given the success of Google and Facebook. Our devices tell a lot about us – where we go, whom we interact with, what we message about, and what products and services we search for.
  • Usage information – Devices can report metrics to manufacturers about how they are actually used.  They can tell what features are actually used and which are ignored. The data can be used to improve the product and ultimately sell more of them.
  • Cost control – Companies can save money by collecting more details about energy usage, and inventory and asset management. Individuals might save costs on healthcare by leveraging medical devices that don't require a doctor visit or being able to control the lights and A/C in the house while traveling.
  • Public safety – The potential for smart networked devices to improve public safety is limitless.  Smart networked sensors can reduce vehicle collisions, improve traffic flow, improve perimeter security, or more quickly analyze a video feed showing a criminal suspect or suspicious behavior. 

What suppliers need to vertically integrate?

Other than focusing on the profit to be made, we can also find M&A opportunity by looking at suppliers that need to expand their offerings to compete.  Examples abound in the semiconductor and embedded software space where consolidation may occur.  Typical candidates would include suppliers that want to expand into areas that are changing quickly, are highly differentiated, and difficult to build from scratch organically.  A good example of this is security technology, either in silicon IP or software.  The stakes of failure are very high, the adversaries (hackers) in many cases are extremely sophisticated and adapting quickly, and the technology is difficult to develop without significant expertise. 

Conversely, we are less likely to see significant M&A activity in segments where there are multiple options of suppliers of mature technology.  Many times these are commoditized software or hardware components that are readily available from multiple suppliers at low cost.  In those segments, buyers are typically going to be unmotivated to make acquisitions and will simply license something that is already available.

Who has the money and the appetite to do acquisitions?

Despite all the potential in the IoT market, not all technology companies routinely pursue acquisitions.  Some simply rely on internal R&D while others essentially outsource R&D by doing lots of deals, large and small.  The companies that do pursue M&A have the cash to do deals and enough pain to take on the effort.  Google and Facebook come to mind. 

Another good predictor of future acquisitions is past history.  In the past two years, buyers of semiconductor or software companies making the most acquisitions include Google (17 acquisitions), Yahoo! (16), Dassault (11), Apple (8), Autodesk (8), Facebook (8), Intel (8), Mentor Graphics (8), and Trimble Navigation (8), according to S&P Capital IQ. Many of these companies can be expected to be active participants in the M&A market for IoT.

In summary, the Internet of Things will drive a great deal of innovation and economic activity in the decades to come, and with that will come M&A deals.  We can expect most of those deals to come from areas where money can be made, where current suppliers need to vertically integrate, and who has the money and desire to grow through acquisition.

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