– Companies are increasingly investing in, partnering with, or acquiring AI start-ups in order to gain a competitive edge in the fast-developing AI sector.
– Mega-cap serial acquirers are adopting a more nuanced AI-focused strategy, looking to build, partner, and buy in order to increase their capabilities.
– Incumbent companies can boost their positions by partnering with AI start-ups to leverage new technology without the challenges of M&A integration.
– AI is becoming an essential tool in M&A transactions, helping to optimize deal sourcing, due diligence, risk assessment, deal structuring and valuation, and post-merger integration.
Amid the current artificial intelligence (AI) hype cycle, companies are jockeying for an edge in this fast-developing sector. So far this year, software M&A is staging a comeback. After bottoming out in the fourth quarter of 2022, it has accounted for more than 600 deals in the first quarter of 2023 as larger, deep-pocketed firms invest, partner, or simply mop up smaller, private, venture-backed companies. While these investment dollars are still a drop in the bucket relative to the dry powder in private equity and corporate coffers, serial acquirers are looking for opportunities to increase their capabilities.
Nevertheless, the M&A playbook has changed. Mega-deals now face a complicated regulatory environment in Europe and North America. As a result, companies like Microsoft, Brookfield, Thomson Reuters, and others have adopted a more nuanced AI-focused strategy: building, partnering, and buying. Incumbents like Enghouse, Constellation Software, Brookfield, and Thomson Reuters are all funding or acquiring AI start-ups to enhance their capabilities. For example, Brookfield Growth, Brookfield’s technology investment arm, recently invested in contract lifecycle management (CLM) firm SirionLabs, Thomson Reuters acquired AI-powered legal start-up Casetext, and Ramp purchased AI-powered customer support startup Cohere.io.
The current AI-driven technological disruption recalls the frenetic innovation of the early-pandemic era. Amid lockdowns, work-from-home (WFH), and contact-free shopping, businesses needed to quickly acquire the tools to transact and compete in the new environment. This spurred robust M&A activity as businesses sought out the right technology and talent. Today, a new M&A cycle has developed, as companies that cannot build such capacities in-house seek to acquire them through investments, partnerships, or old-fashioned M&A.
The new M&A playbook also benefits incumbents by leveraging AI technology without the challenges of M&A integration. Companies like Microsoft and Google are sprinting to the front of the line through multi-year partnerships and investments in AI start-ups, such as Google’s investment in Anthropic and Microsoft’s $1 billion investment in OpenAI. By partnering with these emerging companies, incumbents can reinforce their positions and accelerate their AI capabilities. Additionally, AI is becoming an essential tool in M&A transactions, optimizing every step of the process including deal sourcing, due diligence, risk assessment, deal structuring and valuation, and post-merger integration.
Overall, companies are increasingly recognizing the value of AI in driving mergers and acquisitions. Whether it’s through building, partnering, or buying, AI technology has become a crucial component in gaining a competitive edge in today’s fast-paced business environment.
