Peering Into the Future: How the Pace of Automation Affects M&A Due Diligence

By: Paul Pryzant

One of the hardest areas of M&A due diligence is the target company’s technology. The buyer has to understand the current “technology stack” of the target, which can include a wide range of technologies including hardware, software, data, and sensors. The buyer can’t stop there since it needs to understand the technology stack being used by competitors, which often can’t be easily discerned from the outside looking in. Finally, just as Wayne Gretsky wanted to know “where the puck was going”, the buyer has to know how the use of technology by the target company will need to change in both the near term and long term since this will drive the buyer’s strategy for creating value from the acquisition. Increasingly, buyers also need to understand the automation trends in the target company’s industry to better predict the types of workers that will be needed.

A recent report from the investment banking firm, William Blair, entitled “Convergence Amid a Shifting Industrial Landscape” (August 19, 2019), lays out how advancements in technology are transforming business models throughout the industrial sector. The report details the different layers of the industrial technology stack, starting with the information technology at the top of the stack at the enterprise level, then moving down to the operational technologies which control production processes at the plant level, and finally to the equipment sensors on the factory floor which are using Industrial Internet of Things (II0T) to provide production data on a real-time basis up to the top of the technology stack. These changes in the industrial sector are transforming industrial business models, which are creating new opportunities for suppliers of hardware and software which can help industrial companies in this transformation.

As pointed out in the William Blair report, the changing technology in the industrial sector has widened the skills gap between the workers on the factory floor and the knowledge and training needed to operate the new hardware, software and systems being deployed. This will force companies to either retrain their existing workers to provide the needed skills, find new workers who have the needed skills or tap into specialized outsourcing firms who can provide workers to fill the gap. Understanding these trends is critical for any buyer of an industrial company as well as suppliers of hardware and software to industrial companies.

While the William Blair report focused on the industrial sector, this same type of technology analysis is needed for virtually any target company being acquired. While the technology stack may not be as complex or multi-layered for some non-industrial companies, the buyer still needs to understand the current and future technology needs of the target company to be able to create value from the acquisition. This affects the amount of investment needed in new technology, as well as determining the mix and needed skills of the workforce the target will need in the short-term and over the long term. It is no secret that automation is eliminating jobs in many sectors of the economy, but at the same time, it is creating new higher-skilled jobs that will be more difficult to fill. Filling this skills gap will be one of the keys to whether the buyer can increase the value of the target company and reap the hoped-for benefits of the transaction.