Disruptors at the Gate
Strategic M&A for Managing Disruptive Innovation
Technological disruption — driven by the emergence of complementary technologies including artificial intelligence, big data, and digital connectivity, among others — is fundamentally transforming the global economy. Market leaders across all sectors are facing unprecedented challenges to their competitive positions as rapid innovation has enabled technology companies to cross traditional sector boundaries.
For firms outside the technology sector, addressing the impacts of disruption is now a strategic imperative as organic innovation through R&D alone is often proving insufficient in addressing these seismic shifts in competitive landscapes. Instead, these firms are increasingly pursuing acquisitions of technology companies to acquire new digital capabilities and expertise. In 2017, non-technology companies accounted for two-thirds of all acquisitions of technology companies and 80% of global deal volume involving technology targets over $1bn in size was motivated by disruption.
Based on a detailed analysis of all disruption-driven M&A since 2010, we find that investor receptivity to acquisitions involving technology firms has been highly positive. Buyers in such deals have experienced one-year share price outperformance of 7.3%, far outpacing the performance for firms announcing other types of deals and alternative forms of capital deployment.
Underlying this sharp uptick in M&A motivated by technological disruption has been a wide range of strategic motivations. These have ranged from acqui-hire strategies to recruit new talent, acquiring platforms that enable new market opportunities or strengthen existing business models, consolidating acquisitions, and, in some cases, acquisitions of a disruptive new entrant itself. Across these diverse strategies, investors have responded much more positively to acquisitions that have been proactive in nature. Proactive deals — that disrupt an existing business, allow access to nascent markets, or acquire a disruptor — deemed to be transformative have been particularly well received, with one-year acquirer outperformance reaching 18.0%.
M&A transactions designed to address technological disruption typically involve targets that exhibit high valuation multiples driven by high growth rates — both of which can often exceed those of the acquirer. Therefore, balancing the strategic merits of disruption-motivated M&A with its financial impacts should be of particular focus. Buyers that consummated such M&A transactions at deal multiples below the overall market-implied relationship generated substantial share price appreciation.
In addition, our findings emphasize the importance of investor communication for proactive, disruption-driven M&A. Deals that were accretive and accompanied by investor presentations outlining the strategic and financial merits of the transaction have been associated with significant acquirer stock price outperformance.
Authors: Ajay Khorana,Anil Shivdasani,Cecil Wang,Guocheng Zhong,Peter Hein,