Neil Patel

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Experts are quickly recognizing the role of innovation in driving M&A success, which is emerging as the fundamental reason why companies merge. The last couple of decades have seen a rising number of innovation-driven M&A transactions than ever before.

Typically, companies rely on organic strategies, such as developing new products and services to scale and raise revenues. They also focus on building a presence in new markets and expanding their customer base. However, strategic acquisitions can fast-track growth while conserving resources.

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Companies Focus on Core Tech Assets for Acquisitions

The business ecosystem has been characterized by multinationals and large corporations acquiring small startups to access their Intellectual Property. The targeted company’s tangible and intangible assets can be in the form of patents, innovative products, capabilities, and skill sets.

The core areas where M&A deals focus include artificial intelligence (AI), FinTech, cloud computing, and robotics. Blockchain technology and crypto are other areas that are attracting prime dealmakers’ attention.

Generative AI helps identify opportunities and threats, while deeper data analysis drives growth by enhancing business processes and helping decision-making. Corporations fuel growth and look for futuristic opportunities to lend robustness to their operational models.

That’s how they can maintain their edge over the competition. To continue breaking boundaries and evolving, businesses must understand the role of innovation in driving M&A success.

On the flip side, considering the rapidly evolving innovation space, dealmakers need to be ready for the possibility of obsolescence. Acquirers may find that the IP or capabilities they’ve acquired don’t add any value or synergy to the surviving company.

Innovative Brands Quickly Snap Up Opportunities

Companies like Alphabet, Apple, Microsoft, Samsung, and Apple are well-known as being at the helm of innovation. While you know them as innovators coming up with the latest technology, they’re also famous for quickly snapping up opportunities.

Each of these companies has acquired upcoming innovations in their spheres, which are now integral to their products. A couple of good examples include Siri’s acquisition by Apple and Samsung’s SmartThings and HARMAN purchases.

Microsoft is another excellent example, having acquired 225 companies since the early 1990s. Skype and LinkedIn are among its top-tier transactions. Then there’s Google (Alphabet), which acquired Nest Labs in early 2014. The purchase helped enhance its home automation technology.

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Why Companies Prefer to Acquire Instead of R&D

Investing in setting up in-house research and development units is not exactly economical. R&D units need significant time, capital, energy, and other resources to establish and manage. Companies must also carry the high risk of the investment failing if the research does not yield results.

Not only can the return on investment (ROI) be negative but the results can be unsatisfactory. Since companies are answerable to investors and stakeholders, the negative returns may not sit well with them. Even so, experts estimate that the US spent more than $2.47T on R&D in 2022.

Purchasing a startup with an existing portfolio of Intellectual Property and intangible assets allows companies to benefit from the innovation. They can deploy the technological capabilities immediately without incurring the costs of R&D.

Aside from the financial aspect, acquirers stand to gain from the prestige of combining a well-known and upcoming brand. Taking over the startup’s talent and skill sets is another indicator of the role of innovation in driving M&A success.

Results of a study conducted at Harvard Business indicate that brands having top-notch talent are likely to perform 19% better. But to achieve these performance levels, there should be diversity and inclusion in the workforce.

Accordingly, acquirers can include diverse human resources from underrepresented and historically discriminated groups by purchasing companies with this demographic. A strategic acquisition adds cultural synergies and values by diversifying the company’s talent.

Yet another factor is that once companies reach a certain size, they have pre-determined goals and objectives. Their size is a key deterrent to agility and achieving innovative clarity in their vision and mission statements.

Setting Up Decentralized R&D Units is Also Challenging

While the financial aspect of setting up R&D units is a primary concern, larger companies face other challenges as well. For one, instead of having in-house units, they can outsource the innovation and R&D to other separate teams. These units can be entirely independent and in remote locations.

However, putting together a competent team with adequate experience involves investing resources. Companies must find qualified professionals who have demonstrated a successful track record of innovative ideas.

Further, having teams in separate locations eliminates the opportunity for innovators to interact with the actual producers. That’s because coming up with a disruptive idea is only good enough if it can be converted into a product that customers will want to buy.

The lack of collaboration and interaction with other team members in the company is detrimental to R&D efforts. Companies must also assign managers to oversee the unit and provide criticism and assessment when needed.

An essential downside to having an in-house team is that companies tend to pressure researchers to produce results quickly. When competition is heating up and the tech world is evolving quickly, they may put forward tight deadlines.

Conditions like these are never encouraging for research and can lead to poor-quality innovations that don’t generate adequate market value. Pressure from the management can also result in dissatisfied and frustrated employees and zero return on investment.

In situations like these, acquiring high-performance startups with disruptive concepts and accredited skill sets is always preferable. And that is the role of innovation in driving M&A success.

Expanding Capabilities in Adjacent Markets

Innovation enables corporations to expand their capabilities to adjacent markets. Business verticals connected to the company’s current market but not within its core operating sphere are adjacent markets.

Partnering with a company manufacturing complementary products and services can improve the acquirer’s market share. This strategy is effective in capturing not just the targeted company’s market but also in gaining an edge over the competition in both spheres.

The objective is to gain ground in new territories by acquiring the relevant technology. For instance, a known brand manufacturing washing machines may partner with an upcoming startup developing IoT capabilities. Combining washing machines with smart technology can be disruptive in the sector.

This advancement is essential to maintain an edge because no brand can sustain its market presence without enhancing its products. Better features and additional products in the portfolio are critical and entering adjacent markets can get them there.

Companies may also want to release a series of product versions with slightly different versions with varying price points. That’s how they can hope to capture a varied customer demographic.

Keep in mind that in fundraising or acquisitions, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Achieving Vertical Acquisitions

While adjacent acquisitions enable enhancing the company’s technological capabilities, entering into vertical integration streamlines the supply chain. Acquirers can look for startups and smaller ventures manufacturing product components and integrate them into the organization.

This move enables customization and innovation of the spare parts per the company’s needs. Buying these smaller businesses also gives the larger companies complete control over the unit and sales.

The purchasing company eliminates the possibility of competing brands getting components that are top quality and thus, maintains its edge. Other benefits of vertical integration include cost reduction, compatible products, and avoiding the need to engage in price wars.

That can happen when the smaller company has multiple buyers for its products. This strategy also demonstrates the role of innovation in driving M&A success. Acquiring components is just one of the several examples.

Companies enter into vertical mergers for several reasons aside from purchasing components. For instance, streamlining payment channels and for better marketing and advertising. A good example is eBay acquiring PayPal in 2002. eBay successfully managed payment processes, while PayPal gained a better market presence and popularity.

The Role of Innovation in Driving M&A Success Has Different Aspects

In today’s knowledge-driven business landscape, innovation is in distinct stages. For starters, you have the ideation aspect when scientists and researchers come up with an industry-disruptive idea.

They work in several areas like Artificial Intelligence (AI). Internet of Things (IoT), Virtual Reality (VR), Robotics, or Augmented Reality (AR). Using cutting-edge skills, they develop new concepts that can push barriers.

Next, product developers deploy these innovations in the right areas like business intelligence (BI) and data analytics. They may also use the technology to develop new products to capture a bigger market share and customer base.

Alternatively, they may use the innovation to enhance existing products and integrate it into them. Or, they may create entirely new product ranges that transform everyday living as we know it.

Investors and acquirers may not be keen on backing scientists and researchers. However, they offer support to companies that have demonstrated they can successfully deploy technology to meet evolving customer demands.

Moving forward, experts expect to see more acquisitions in sectors like eCommerce, HealthTech, PropTech, FinTech, and AutoTech. Other than hardware, the stress is on adjacent markets, including software capabilities to run the hardware and improve customer UX.

Technology that ensures compliance with environmental regulations is also at the forefront of key acquisitions across the board. Cross-border M&A deals are also quickly gaining traction with larger corporations being open to buying companies in off-shore locations.

The objective is to acquire Intellectual Property, intangible assets, and skilled talent. That is even if the targeted company continues to operate as the buyer’s subsidiary.

Whether acquisitions or fundraising, the most critical step is knowing how to navigate the due diligence process. Check out this video where I have explained how to do that.

Potential Challenges for Innovation-Driven M&A Transactions

Although acquirers accept the role of innovation in driving M&A success, getting the technology comes with its own set of challenges. Before entering into the transaction, dealmakers should do the due diligence to understand the potential pitfalls.

IP Ownership Issues

IP has quickly become the core differentiator when building a list of targeted companies to acquire. IP adds value to the deal since it has myriad benefits. By using intellectual Property, companies can gain a competitive advantage and diversify their product portfolios.

Accelerating growth, sustainability, revenues, and profits, along with a larger customer base are only a few of the other advantages. However, before entering into the IP-driven M&A transaction, dealmakers should be clear about their objectives from the knowledge transfer.

Further, they need to navigate the potential risks such as identifying ownership rights, lien on the IP, and several other issues. Buyers also need to ensure that they will have unencumbered rights to use the IP. And market any products they create using the technology.

Any legal or non-legal issues they face after the deal closes can bring down the value of the IP they acquired.

Integration Issues

The role of innovation driving M&A success cannot be refuted, but buyers should draw up a detailed integration plan. To derive complete synergy from the acquisition, acquirers should know how to use the technology they have purchased.

Appointing the right team with trained professionals can make the ultimate difference in achieving value from the deal. The acquiring company will have to work out several aspects such as whether the targeted company will enjoy autonomy.

The extent of integration–partial or complete–is another aspect to work out. Restructuring the surviving company, cultural integration, reworking the management board, and building a new collaborative business model are areas to focus on.

Before We Sign Off!

As the cost of research and development scales new heights and competition gains ground, larger corporations must consider alternatives to maintain their market presence. Innovation-driven M&A deals seem to be the answer.

Dealmakers simply scour the market for new startups coming up with ground-breaking tech IP and the core skill sets that create the IP. The next step is purchasing these companies but also allowing them the autonomy to function independently as subsidiaries.

Integrating the purchased companies and their teams into the parent company also allows them to governing capabilities. With efficient collaboration and integration, companies can seamlessly deploy the newly acquired innovations and use them to create new products.

This strategy is thus, the optimum method for long-term success. Just as some of the top brands in the world have demonstrated.

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Neil Patel

I hope you enjoy reading this blog post.

If you want help with your fundraising or acquisition, just book a call

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