Matt Stamp recently joined us as a keynote speaker at our IoT Investor event ‘Seizing the IoT Opportunity’, held at Aviva’s Digital Garage in the heart of Hoxton. We took the chance to catch up with Matt and get his views on how he believes the M&A landscape in IoT is set to develop and the opportunity this represents for investors looking to get involved now.
What’s happening with M&A in the IoT arena right now?
The IoT market is really just getting established. It didn’t really exist 4 or 5 years ago, so we’re just coming towards the end of the 1st 5-year development phase and we’re already seeing some strong exits. As it stands, there have been 400+ M&A transactions, with a combined value of over $35bn. But in my opinion, there are many more and much stronger exits to come.
In these early years, we’ve seen activity in consumer IoT with companies like Nest, Hive Dropcam and Ring being snapped up by tech giants and hitting the headlines. But the balance is now clearly shifting in favour of industrial IoT. That’s where I see the market heading – because it’s there that companies are able to demonstrate bigger and better-understood use cases. And it’s where the technology is really pushing business models forward in ways that unlock new value streams.
What trends are you predicting for the future?
In the near term we’re going to see industrial IoT clearly overtake consumer applications in the M&A market. Also if we look back, we see a US flavour to transactions. But looking ahead, we’re likely to see a lift in both volume and value of transactions in Europe.
Companies dealing in horizontal solutions - like platforms - have proved popular to date with large, established technology players. I foresee the next 5 years prompting interest from a broader set of buyers, but with growing interest in more specific, vertical markets and application lead businesses.
What factors are driving these developments?
There are a number of reasons for these shifts. First of all Silicon Valley leads the charge for any high-growth tech innovations. Because that’s the primary home to many of the world’s biggest tech brands. So that’s where a lot of early activity comes from, as the biggest players deploy large amounts of capital to rapidly build out their tech stacks.
Europe follows on. Investors over here have a reputation for being more cautious. They want to see proof of potential returns prior to committing. But, this bodes well for the longer term, as they reap the rewards of backing more winners, with even better and more consistent results. So I fully expect to see European exits increasing in value to $100M, $200M and even $300M+ over the next 6-18 months as the market continues to mature.
What are corporate investors looking for?
They can be looking for several things, dependent on their strategy.
Firstly, they can be buying in capability, technologies and teams to shore up what they already have in-house. Secondly, they might be land grabbing. IoT propositions are sticky, so some companies will deploy capital quickly to establish footholds into markets that will enable them to dominate longer-term. Or thirdly, the strategy might be a defensive play. For companies that see disruption from innovators as a threat, they may move to acquire in order to safeguard their core businesses.
What are your views on how IoT companies are being valued?
This is the question I get asked the most. Predicting values is quite difficult, because the market is still fairly young, meaning there’s a fairly limited data set to draw from. There are also a number of different ways of valuing and a lot of different parameters to play with. The breadth of IoT is so wide, spanning many different vertical – all of which might be performing differently. For some companies, we look at traditional EBITDA multiples. For some – like platforms – we might hit double-digit multiples. But suffice to say that valuations are currently good for the right asset.
What drives higher valuations?
IoT is strongest where hardware and software is a given and the focus is on servitisation ‘as service’ propositions and delivering recurring revenues. Investors see these kinds of opportunities as very attractive. But timing is everything in M&A. You only need to take a look at the Gartner Hype cycle for the technologies associated with IoT to see that different segments are at different stages and developing at different rates. Factor in scarcity, level of interest, track record, risk and the strength of any partnerships that a target might have and that’s why organisations come to us. Because investments in this space warrant an extremely detailed case-by-case analysis.
I think strong and well defined use cases also help. We are seeing some big contracts going to relatively small companies – so there are big growth opportunities to be had. Often those smaller companies have taken the time and care to partner with bigger tech companies. It creates a point of trust that can translate into confidence for investors. But any IoT company that can prove they have a formidable use case that delivers improved productivity, efficiency and ROI to their customers is on the right track.
Matt Stamp leads Acuity’s IoT teams and sector coverage, advising on tech M&A and has led 15+ IoT projects in the last 18 months including 4 closed deals.