A Fever for Machine Learning Companies

Amid a steep drop in the tech M&A market, purchases of companies with machine learning (ML) capabilities continue to rise. ML's popularity was growing before the COVID-19 outbreak and our surveys suggest that the illness could accelerate adoption. Moreover, many ML deals have the qualities of the kind of acquisitions that can get printed in this environment – low-risk bets on familiar markets.

Just days away from wrapping up the second quarter, the number of ML transactions stands at a near record. According to 451 Research's M&A KnowledgeBase, 76 machine learning targets have been bought during the quarter, making it the third-busiest three-month stretch on record and already 20% more deals than the same time a year ago. Compare that with the broader M&A market, where deal volume is down by roughly the same amount.

ML buyers are often seeking features and software that bring the tech into their product portfolio, for selling to customers and markets they already know. Pickups of companies that play in familiar markets are easier deals to get done than riskier bets to enter new markets. Multiple day-long management meetings, dinners and a formal banker-led M&A process are all difficult with social and travel restrictions in place. And all are less important when purchasing a company operating in the same sector.

Of course, not all recent ML transactions fit the description. Amazon's announcement this week that it's entering the robotaxi business with the acquisition of Zoox is a notable exception. More frequently, the buyer is applying the acquired tech in a comfortable market. Three of the largest deals this quarter certainly fit that profile:

• Early this month, National Instruments printed its largest tech transaction to date with the $365m purchase of OptimalPlus. There's significant customer overlap between the buyer's testing systems and the seller's supply chain analytics software for semiconductor, automotive and electronics vendors.
• VMware reached for Lastline, augmenting its previous pickup of Carbon Black with additional ML models that could increase the sophistication with which network-based attacks are identified. (See our estimate of terms of that deal here).
• In the largest ML transaction of the quarter, Intel paid $900m for Moovit, a developer of navigation software. The acquisition brings more smarts to the storied chipmaker's autonomous vehicles business – a market it has been in since 2017, when it paid $15.3bn for Mobileye.

Of course, deals don't happen because they're easy to wrap up. Buyers are looking for value. Our surveys suggest that the value of ML and other emerging technologies may be gaining speed. The pandemic hurt IT spending at some companies. But on balance, it has increased the appetite for newer technologies. In 451 Research's Voice of the Enterprise: Digital Pulse, Coronavirus Flash Survey June 2020, one in four (25%) respondents said their organization accelerated or launched digital transformation projects as a result of the outbreak, compared with 18% who had canceled or delayed those projects.