As interest in industry 4.0 M&A grows, data remains a sticking point
As interest in industry 4.0 M&A grows, data remains a sticking point
During COVID-19, the need for increased digitisation has been apparent for manufacturers. As a result, the interest in Industry 4.0 and related manufacturing technologies is on the rise.
However, both manufacturing companies and industry technology suppliers face data challenges. Unlocking said data’s inherent value is key to generating insights and competitive advantages. This is especially true for the core technologies that market leaders are leveraging to achieve breakaway performance.
Data drives TMT strong performance
BDO M&A data details how mid-market deal activity remains very strong across technology, media, and telecommunications (TMT).
For the seventh quarter in a row, TMT was the most active sector for mid-market M&A during the third quarter of 2021. With 612 completed mid-market TMT deals, Q3 saw a year-on-year deal increase of more than 50%. Total disclosed deal value reached US$66 billion, more than 60% higher than 2020 Q3.
Over the first three quarters of 2021, there were 2034 mid-market TMT deals worth a combined US$216 billion.
Data: MergerMarket, Graph: BDO Global.
Private equity (PE) activity remains high, and Q3 2021 had 259 PE deals in TMT worth a combined US$33 billion. The deals represented 42.3% of global TMT deal volume and 48.6% of deal value.
The total for 2021 across three quarters is 894 mid-market PE TMT deals worth a combined US$108 billion.
Software in the driver’s seat
TMT deal activity is dominated by technology. About 65% of all TMT deals in 2021 have been technology deals.
Software is the prime driver of M&A deals within technology, representing just under 90% of all mid-market technology deals.
Data: MergerMarket, Graph: BDO Global
BDO surveys of decision-makers underscore a need for increased digitisation across industries. As a result, companies are dedicating more funds to invest in digital solutions and talent – or acquire the solution providers. Gartner predicts that global IT spending will surpass US$4 trillion in 2021.
Data: Gartner, Graph: BDO Global
John-David Lovelock, distinguished research vice president at Gartner, has explained how companies are increasingly looking to implement more holistic IT strategies and solutions:
“CIOs are looking for partners who can think past the digital sprints of 2020 and be more intentional in their digital transformation efforts in 2021. This means building technologies and services that don’t yet exist, and further differentiating their organisation in an already crowded market.”
This is a core driver for both mid-market software M&A and increased company investments in software upgrades to support business efficiency, innovation, production processes, and decision-making.
The dynamics described above also apply to manufacturers who are experiencing several significant shifts.
Technology driving changes
Risks in manufacturing have evolved over the last couple of years. Tensions between major powers like the US and China and the UK and EU and new tariffs increase trade complexity. Simultaneously, supply and product chains are stretched due to COVID and continued logistical issues. Furthermore, many countries are experiencing staff shortages and struggling to find qualified employees.
The results for countries and companies relying on globally distributed supply networks, as illustrated by the chart of US imports by country below, is heightened complexity. Efforts to mitigate the impacts include internalising or nearshoring production and increasing digitisation throughout all parts of the production and sales process.
Source: Harvard University
Industrial digitisation is often considered part of the broader transformation toward Industry 4.0. The term refers to the integration of new technologies throughout every step of the product chain, including robotics, edge computing, Internet of Things, 3D printing, and AI. In manufacturing, Industry 4.0 represents a fundamental change where all parts of a company and its surrounding ecosystem becomes an intelligent network of machines and processes that exchange information and communicate in real-time.
2016 overview of developing Industry 4.0 technologies. Source: ProfHvS.
As for technology in general, software is a key driver of the projected market growth expected across various aspects of Industry 4.0:
Data: Cowen / Grand View Research, Graph: BDO Global
During the pandemic, manufacturers have had an increased need to focus on digitisation. In many cases, digitisation is a crucial first step toward reaping the full benefits of Industry 4.0 technology. Their incentive to increase focus on digitisation has been further boosted by their peers’ performance. Manufacturers with advanced digitisation levels and a focus on using data to make decisions have demonstrated greater resilience. Furthermore, said companies are best positioned to succeed in the future.
Both conclusions stem from the latest edition of BDO’s survey on digital transformation for manufacturers. The survey also reveals that early Industry 4.0 adopters have begun to achieve breakaway performance.
Data remains a pain point
Another trend identified by BDO’s survey is how manufacturers are often tested by digital thread creation. Throughout every part of operations, digital threads function as the communication frameworks and highways connecting data flows across supply and manufacturing chains. The data is core to generating an integrated view of products and product parts throughout their lifecycle. In other words, without solid digital threads, integrating Industry 4.0 solutions or attempting to increase digitisation is likely to be extremely challenging. Initiatives will also suffer lower efficiency rates.
Source: BDO’s 2021 Industry 4.0 Survey.
One of the issues hampering the integration of effective digital threads is pervasive data silos. Furthermore, creating and implementing company-wide data transparency strategies and systems requires specific, highly sought-after skillsets. However, the main underlying issue is often that companies struggle to gather and structure data effectively.
As a result, many companies’ investments in areas such as data analytics are not necessarily yielding the hoped results. According to IDC, this contributes to increased interest in industrial technology M&A throughout manufacturing. The underlying logic seems to be that integrating solutions and skills from start-ups and scaleups is a time-saving way to make better use of data.
Simultaneously, it incentivises M&A for industrial technology start-ups and scaleups with strong data capabilities. As the market for their solutions continues to grow, advanced industrial technology companies consider M&A activity to build out market shares or add new solutions to their portfolio.
One example is Schneider Electric’s acquisition of ProLeiT to expand its reach in the market for automation and management of manufacturing plants.
M&A includes SPACs
M&A activity also includes strategic investors, investment banks. venture capital (VC) and private equity (PE) firms. Some of the latter are deploying novel approaches, such as SPACs. One example is Cascadia Capital US$150 million Cascadia Acquisition Corp SPAC. The goal is to pursue an emerging technology company in the Industry 4.0 space.
Many other deals in the technology space, including industrial technology, are also led by outside investors. A 2021 report from Bain & Co. estimates that up to 75% of acquisitions in technology come from companies in other industries and private equity.
Navitas Capital is one of the active PEs in the space, having recently made two data-related industrial technology acquisitions - BDR and Vantage AI. Vantage AI supports clients in their transition to data-driven organisations, while BDR offers design, implementation and industrialisation of machine learning and AI solutions.
AI Across the Board
Navitas’ acquisition provide a good illustration of how the next step for many manufacturing companies after creating robust digital threads is focused on integration of AI. 5G, IoT and ERP are also among the core next-step technologies.
Source: BDO’s 2021 Industry 4.0 Survey.
Some of the use cases for AI in manufacturing include:
- Predictive equipment maintenance and supply chain management
- Increased data protection
- Real-time production optimisation
- Decentralised production
- Automate sales and customer communication
- Demand forecasting and inventory management
However, AI solutions for all aspects of manufacturing require solid, structured data in order to function.
This is one of the reasons why we believe that both technology companies and parts of manufacturing will continue to leverage M&A to address the issues surrounding data. Furthermore, with record levels of dry powder available to PEs, VCs, and strategic investors, M&A activity in advanced manufacturing technology, such as Industry 4.0, is likely to increase.