IoT's extraordinary impact on tech M&A

Emerging tech trends often lead to above-market multiples, although they are rarely so large and plentiful to drive much of the overall dealmaking. Yet the appetite for Internet of Things (IoT) targets is doing just that. IoT – the loose alliance of trends in connectivity, miniaturization and artificial intelligence – is creating new businesses and revitalizing old ones. Unlike other developing trends, targets swept up under the guise of IoT are both young startups and mature businesses. But there's more driving deal prices in IoT than the consolidation of maturing industries with the wrapping of a shiny new trend.

According to 451 Research's M&A KnowledgeBase, IoT generated $93bn worth of tech dealmaking last year, nearly one-fifth of all value for the year. Compare that with, for example, machine-learning targets, which accounted for less than $4bn of M&A in 2016. IoT's impact has continued throughout the first quarter with more than $15bn of the $81bn in overall tech M&A so far this year. Multiples being paid for those targets show that fresh opportunities for growth, more than consolidation, are baked into the abnormally high share of deal value.

Qualcomm's $39.2bn purchase of NXP Semiconductors highlights how IoT opportunities are driving up multiples. The buyer paid 5.5x trailing revenue for a company with sales channels into automotive and IoT – areas where it hopes to apply its mobile expertise. That's well beyond the market rate for a semiconductor vendor with annual growth in the single digits and more than double the 2.7x median multiple for all chip M&A in 2016. Look to SoftBank's $32.4bn ARM Holdings buy for a more extreme example. That transaction valued the target at 21x, suggesting that SoftBank placed a bet on the IoT sectors ARM hopes to conquer, more than the ones it already has.

More recently, Intel's $15.3bn pickup of Mobileye, a maker of components for automated vehicles, provides solid proof that IoT enlarges multiples. The pure-play IoT specialist garnered 41x trailing revenue, nearly double the previous record for targets across all tech segments, generating north of $100m in annual sales. Other mature markets beyond silicon are getting a boost in valuations from IoT. Earlier this month, ABB nabbed B&R, a 37-year-old industrial automation firm, at a reported valuation above 3x TTM revenue. Only once has an industrial automation target crested 3x, and the median for such deals is a bit under 1.5x.

IoT's extraordinary contribution to deal value totals will likely taper off throughout the rest of the year. Semiconductors had a prominent role in boosting the IoT M&A totals and two years of record consolidation in that space has left a diminished pool of targets. In other IoT sectors, a host of smaller vendors are battling for share in virtual reality, IoT security, narrow-band networking, wearables, and other niches. Most of these companies lack the blend of new opportunities and legacy sales that old-yet-new-again IoT providers sport. Even at above-market multiples, they won't propel consolidation.

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