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5. The most popular digital assets

Our study shows that software also dominates the digital/tech M&A activity of the S&P Global 1200, with 39 per cent of their acquisitions in the space involving application software businesses.

Spending was highest on healthtech assets ($192bn), with cognitive technologies and AI next in line. On an average deal value basis, the S&P Global 1200 are spending the most on the latter asset class, with each acquisition costing $2.3bn.

Breaking down deal volumes over time also reveals some fascinating trends, such as that acquisitions of large data sets and cognitive analytics businesses roughly doubled every three years, and that the number of transactions involving digital industrial solutions assets also doubled between 2014 and 2017.

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M&A through a digital lens

As we have already mentioned, when acquiring a digital/tech business it is important to ensure that due diligence checks are designed around the asset’s key value drivers and risks, which are subtly different in each of the categories outlined below. Buyers need to scan the horizon for emerging regulations that could threaten future revenue streams, and with authorities starting to consult on potential regulatory models to shape the development of AI for example, and pay much closer attention to how a business’s use of data affects both consumers and markets.

It’s also vital to secure control of, and usage rights for, intellectual property, which in software companies can be threatened by the target’s use of open-source code or its relationship with its developers. We have seen buyers walk away from digital deals due to uncertainty over the ownership of code created by contract consultants, while others have run into issues linked to  research grants for early-stage development. Reviewing cyber resilience is essential if the target’s value is tied to its data, and carefully considered deal terms can help mitigate risk, if, for example, the target has suffered a data breach. 

The way the target is structured also requires close attention. New digital taxes are being introduced across the world, and in Europe state aid investigations are a particular threat. Savvy buyers do this work as part of a holistic structuring approach that also considers how to maximise IP protection and minimise risk from a range of other regulatory frameworks.

What’s different about digital deals?

Partners Natasha Good, Giles Pratt and Julian Pritchard discuss how to mitigate risk in tech M&A – and avoid the pitfalls that can put your investment at risk.