The Internet of Things (IoT) is getting down to business. Out of the 8.4 billion connected devices currently in use, Gartner estimates that over 4 billion are aligned to business practices. This industrial slice of the IoT pie is expected to grow to 7.5 billion by 2020.
Industrial IoT (IIoT) has the potential to revolutionise the world of business, and to transform the world that we live in. Take the humble street light: it’s no longer just a lamp post, but can also be an environmental monitoring station, host security or traffic management cameras, a wifi hotspot, and a charging point for an electric vehicle.
This is but one example of the significant business opportunity of IIoT. It’s a broad church: IIoT spans smart cities and futuristic farming to healthcare and energy networks, as well as far out ideas such as smart dust. It’s early days still: a survey by GE found that 80% of respondents believe that the IIoT will be transformational to their companies and industries, but only 8% said this digital transformation is currently “ingrained” in their business.
What’s happening in IIoT M&A?
At Acuity Advisors we think one of the most interesting and well-developed areas for IIoT M&A continues to be connected vehicles, especially commercial vehicles and public transport. The amount of high profile deals in the space has continually increased in the last few years. But for both buyers and sellers, there continues to be a significant opportunity to transact. Verizon signalled that the connected vehicles sector area was undoubtedly a hot one to watch when it acquired Telogis, a developer of telematics, compliance and navigation software used by the likes of Ford, Volvo and GM. Verizon also acquired LCV specialist Fleetmatics, which provides location services, driver and car security services, fuel tracking, dispatching and invoicing, spending $3.5 billion on those two deals. As its traditional business is declining, this is the strongest signal to date that Verizon sees the strong potential of enterprise mobility.
The market Industrial IoT was already worth $100 billion in 2016, and is expected to grow at 25% CAGR until it reaches $934 billion by 2025, according to research by Grand View. As managers across all industrial segments are looking to IoT to improve performance through analytics, automation and asset tracking, companies have caught onto the opportunity: last year, Viasat acquired emergency vehicle equipment provider MobileFleet and navigation specialist ICOM, while Orbcomm bought Blue Tree Systems and InSync Software for their telematics solutions expertise, Michelin acquired US focused NexTraq, Isotrak brought in SaaS specialist Verilocation, ABAX sold to new investors Investcorp and Eurowag acquired Princip in the Czech Republic.
The strong deal volumes in M&A will carry on for a good while to come, but buyers are becoming more discerning, says Richard Baker, Partner at Acuity Advisors. This means that sellers need to make more of an effort to differentiate themselves in a way that will attract the right attention. Having specific deep domain expertise is one way for a smaller company to attract the attention of a big player:
“Within industrial IoT, this connected vehicles segment is one of the most mature,” says Baker, referring to the number of connections, the size of these companies, and number of areas where they’ve deployed their technology. “There’s a flurry of activity. Companies are being snapped up and buyers are getting what they’re looking for. But you need to be well-prepared and focused to get one of these bigger companies to buy you.”
This was the case when Fältcom sought out the expertise of Acuity ahead of its sale to Telia, the leading telco in the Nordics. “Fältcom focused on markets that had a real need for their robust, ultra-secure connected solutions and benefited from their eco-system of focused applications. The company built momentum with key customers including Volvo, Bentley and Nobina. By 2016, they had deployed over 40,000 connected devices. This enabled Fältcom to further hone and develop additional software applications that were not only scalable and addressed key market pain points, but also added significant value in providing further business intelligence, efficiencies and insights to their customers.” Fältcom had also managed to successfully establish themselves in New York City, which has had an ultra-secure network since 9/11. “The security aspect means this area is very difficult to break into, but this Swedish company utilised their extensive capability to break in,” says Baker. Fältcom is now deploying their technology further, making headway into buses, signage and the so-called totem poles in NYC that are critical to the transport infrastructure.
How can companies take advantage of the IIoT M&A wave?
Innovative industrial companies are looking to IIoT to capture growth in three distinct ways, concluded a study by Accenture. Firstly, companies seek to boost revenues by increasing production and creating new hybrid business models, such as pulling data from physical assets to use in digital services, either as new income streams or to improve productivity within the company. Secondly, companies are looking to fuel breakthrough innovations through intelligent technologies, sensor-driven computing or intelligent machine applications. And thirdly, industry players are seeking to transform the workforce to cultivate new skills.
With such vast and wide-ranging changes on the horizon, things are happening quickly in IIoT M&A as companies seek out key strategic acquisitions. But Baker points out that buyers are not just buying on speculation, as the industry segment has reached a point of maturity where they can focus on finding what’s right for their specific needs. “The winners will be the companies who offer the most economic, or technology advanced, solutions to the customer,” says Baker.
“There is a maturity shakeout in the industrial IoT space. Sometimes buyers are looking for geography, other times they’re after tech, or they’re looking for something that’s attractive to a certain element of their market, for example Heavy Commercial Vehicles (HCV). In any case, what buyers want is that deep domain expertise.” This is no longer an innovation land-grab, adds Baker, but the upside to that is that there’s more money to be made.
Companies that are looking for an exit in the short to medium term need to consider now how they can meet the requirements of buyers who will be considering acquisitions with a very specific wish list. “Companies need to consider what they have, what their immediate roadmap looks like, and how they can focus strategy to be in tune with market demands,” says Baker. “Only by being in tune with what buyers requirements are, can they ensure that the decisions they’re making now, ahead of an exit, mean they’re focusing their development and capital on doing the right things to attract those buyers.”
These rules apply to companies across all aspects of Industrial IoT, says Baker, not just the connected vehicles segment. Artificial intelligence is becoming increasingly relevant to the industrial IoT sector, he adds, but this is still at an early stage. But Baker’s experience dictates that the Industrial IoT companies that have secured successful exits have been targeted in their focus:
“They’re not just competing on price or trying to pile it high. They deliver tech that’s attractive to their customer base, either because it does something different or better, or because it brings several areas together in a way that adds real customer insight and value.”