Amid the present artificial intelligence (AI) hype cycle, corporations are fighting to remain ahead of this rapidly evolving sector.
Software to this point this 12 months M&A is making a comeback. After bottoming out within the fourth quarter of 2022, there have been greater than 600 transactions in the primary quarter of 2023 as larger, financially strong corporations put money into, partner with, or just acquire smaller, private enterprise capital-backed corporations. While these investment dollars are still a drop within the bucket in comparison with the dry powder in private equity and company coffers, serial buyers are on the lookout for ways to expand their capabilities.
Still, the M&A playbook has modified.
Mega deals face a sophisticated regulatory environment in Europe and North America. That’s why Microsoft, Brookfield, Thomson Reuters and other large serial buyers have pursued a more nuanced, AI-focused strategy: To quote Steve Hasker, president and CEO of Thomas Reuters, they’re searching for “Build, grow to be a partner and buy.”
Enghouse, Constellation Software, Brookfield and Thomson Reuters are amongst the businesses financing or acquiring AI start-ups. Earlier this 12 months, Brookfield Growth, Brookfield’s technology investment arm, invested in contract lifecycle management (CLM) company SirionLabs; Thomson Reuters acquired Casetext, an AI-powered legal startup that recently launched CoCounsel, an “AI legal assistant”; and the financial automation platform ramp bought Toronto-based Cohere.io. Other big deals include the information management company DatastonesThe $1.3 billion purchase of MosaicML, a generative AI startup whose technology allows corporations to create proprietary versions of OpenAI’s ChatGPT.
Today’s AI-driven technological disruption is harking back to the frantic innovation of the early pandemic era. Amid lockdowns, work-from-home (WFH) and contactless shopping, corporations have needed to quickly acquire the tools to conduct business and compete in the brand new environment. This sparked strong M&A activity as corporations searched for the precise technology and talent.
Today, a brand new M&A cycle has emerged as corporations unable to construct such capabilities internally seek to accumulate them through investments, partnerships or old-fashioned M&A.
How the brand new M&A playbook strengthens established corporations
AI has brought more excitement to the somewhat staid incumbents. Both Microsoft and Google are sprinting to the highest through multi-year partnerships and investments in AI start-ups. Google invested $300 million in Anthropic and Microsoft spent $1 billion on OpenAI. And in a single virtuous circle By upcycling revenue, such tech giants also get “cashback” from the recurring revenue they earn from the identical startups. How? By providing cloud-based services, access to supercomputing power and other varieties of resources that AI requires in large quantities.
By working with these emerging young corporations, but not necessarily acquiring them (yet), established corporations can avoid thorny regulatory issues while leveraging recent technology to further strengthen their position. They can speed up their AI setup without the burdens related to M&A integration, akin to legal work, data migration, contract and team management, and cultural fit.
Another example of how the emerging ecosystem advantages incumbents: When the time for acquisition comes, AI may help facilitate transactions. M&A transactions require massive, resource-intensive efforts, and AI may help streamline every step of the deal. Whether it facilitates deal sourcing, due diligence, risk assessment, deal structuring and valuation, or post-merger integration, AI is quickly becoming a vital M&A tool.
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