Last month I wrote about the Internet of Things (IOT) in Manufacturing Automation, but of course this is just the one application domain that is impacted. So what exactly is the Internet of Things and is this a real trend that will develop its own eco-system leading to significant M&A activity beyond Manufacturing Automation, or just another bubble or worse yet, marketing hype?
The Internet of Things is widely accepted as the network of physical everyday objects embedded with sensors, electronics, software, and network connectivity to enable these objects to collect and exchange data without direct human or central computer interaction. Personally, I suggest this is not as revolutionary as it might seem on the surface, but the natural evolution of technology; Starting when mechanical devices were wired to make them electro-mechanical, then had electronics added to become mechatronic and now these same devices connected to the Internet to form the Internet of Things in a logical progressive application of available technologies.
But that is not to say the trend isn’t big or transformative. Just the opposite. However we got here, IoT is real and it’s not going away. As mentioned last month Gartner Research estimates that by 2020 there will be over 25 Billion endpoint units connected to the internet and BI Intelligence estimates the software to drive it is close to a $200 Billion market today and will grow to approximately $600 Billion by 2019, a 44% annual growth rate. But why is this significant to M&A?
Over the past 3 years Mirus has identified 65 acquired companies that positioned themselves squarely in IoT (I am sure there are more that play in IOT but didn’t position themselves there, Nevertheless this is a good sample). 57 of those transactions occurred in just the last two years a clear acceleration of activity in the space. Here are some observations:
- The vast majority of companies acquired were under $100M in revenue and averaged $50 M. This makes sense with new technologies coming to the market and the appetite of larger conglomerates for innovation coupled with a huge amount of cash available in the market today.
- Surprisingly, and despite what you hear in the market (you always hear about the exceptional multiples), the ratio of total enterprise value to revenue was just 2.28:1, with a 17X EBITDA multiple. In many cases this was a sign of young start up simply running out of cash before they could reach critical mass and needing to sell.
- The acquisition market is broad-based with no dominant player acquiring multiple companies. There were in fact many companies with a single acquisition. Mirus believe this is the nature of infrastructure plays and is likely to change as application acquisitions become more prevalent and companies vie for industry dominance. More below.
- Acquisitions were split between Europe 17%, North America 50% and Asia33%. Again with infrastructure dominant (see below) read what you will into the future of which countries are placing big bets on IoT (US – China – Other).
- Slightly over 2/3rds of all acquisitions have been in what we call infrastructure: Connection platforms, SW tools, and Security. 1/3rd of those (20% overall) were communications platform related. This is significant because it demonstrates the scramble for infrastructure and connectivity plays. Aka larger companies acquiring technology with which to enable communications of devices to the Internet, complementing their existing capabilities and responding to demand from their customers (along with SW development and security tools to go with it). This is a classic case of infrastructure preceding demand or “build it and they will come.” The time is now for IoT infrastructure plays. More on this below.
- 18% of acquisitions were made in applications domains: consumer, geo sciences, wireless, asset tracking and of course manufacturing automation. We did not note any particularly central area vs another but moreover a broad applicability. What we do believe is that this is just the tip. Like the software growth numbers above, Mirus believes that over the next 10 years the action will be in the applications. Once infrastructure is established, it will be refined and expanded but new technology acquisitions will wane and applications will accelerate as establish companies buy innovation for their mature product lines, assimilating small startups and their cutting edge technology (and making some folks rich along the way).
- And then of course there are the tangential 14% of acquisitions in services (the vast majority of which are system design). These companies and their skills will continue to be popular until the staffing market adjusts and IoT design (systems design) skills become readily available. Like HTML programing years ago, consultants could charge what they wanted, now everyone does it. Moral of the story? If you reside here – make hay while you can, then adapt and on to the next thing.
So is IoT real? Let me put it this way as veteran of a 30 year PLM career that served me well. If I were a young person just getting started, I would have no problem hitching myself to this star and riding it for a long, long time. In just this past year, we at Mirus have engaged with a number of companies around M&A in IOT and it is rapidly becoming a major focus for the technology portion of our company and my personal practice.