How “differentiated” technology will change M&A valuations

Buyers are increasingly targeting “differentiated” technology in merger and acquisition (M&A) deals, knowing they are going to be judged on the potential of what they can achieve with the technology they are purchasing.

The value of an acquisition will increasingly focus on the upside of the technology the buyer is acquiring, rather than on the acquiring firm’s historic financial returns or performance, predicts Philip Heywood, a partner of financial services deals with PwC Canada. “Those [deals with a high tech upside] will be going for very strong valuations, particularly where there’s a particular advantage to the technology that they develop.”

The real differentiator is going to be something that allows the buyer to “do something different or communicate with the customer in a different way,” Heywood told Canadian Underwriter recently.

Sought-after technologies would include strong, digitally-enabled customer interfaces that reduce friction in transactions, and that allow firms to interact with the customer in different ways. Mobile technology or pay-per-use models would be examples.

In the short-term, it’s about the ability to communicate with the customer. Combine that with artificial intelligence and telematics, which will help companies refine their pricing model over the long-term.

“Brokers or carriers that have differentiated tech – particularly around getting customer data and having a holistic view of the customer – will likely be a strategic rationale for doing the deal,” Heywood said. “Therefore, the buyer is going to be keen to lock up that tech advantage and be able to cross-deploy it back into their own premium and policy base.”

A carrier with advanced technology will have a “deep and holistic” view of their customers. They will be able to tell, for example, what home and car insurance their customers have, where they work, how far they drive and if they have a holiday boat. So aggregating that data set, whether that’s pulling from social media and other sources of data, like mobile devices, “that’s really going to be the tech advantage,” Heywood said.

A keen interest in technology improvements – especially around customer experience and emerging technologies – is driving investment. This is particularly true of larger carriers, which are purchasing mainly minority investments in tech start-ups. They are also buying majority investments, as witnessed by Travelers recent acquisition of a majority interest in Zensurance, a Canadian online manager of commercial insurance products.