Digital transformation and AI Adoption to reign M&A

Authored Article by Mr. Sandeep Gogia, Managing Director, Investment Banking, Equirus.

In today’s business landscape, Digital transformation is no longer a choice, but an imperative. As businesses increasingly grasp the transformative potential of digital technologies, digital transformation spends are expected to climb to USD 3.9 trillion by 2027, with more than 90 per cent of companies across diverse industries actively engaging in this evolution.

AI is well recognised as a critical technology.

Amidst this digital renaissance, Artificial Intelligence (AI) is recognised as catalyst for innovation and efficiency. AI is seen as a critical part of their technology strategy by many Technology companies second only to Cloud computing. As businesses recognise the potential of AI to revolutionize operations, decision-making and customer experiences, the demand for AI adoption is expected to reach unprecedented level. Today 38 per cent of enterprises are actively implementing generative AI, with another 42 per cent exploring it and 59 per cent of enterprises are already working with AI looking to accelerate and increase investment in this technology. Large enterprises are deploying AI across varied use cases, from utilizing Salesforce’s Einstein for writing customer communication and gaining actionable insights to informed conversations and using Co-Pilot to prepare sales pitches and proposals, to developing custom tools for automating complex processes like insurance claims to deploying AI chatbots for Customer Service. As technology priorities evolve, AI is increasingly becoming a key focus area for technology spend. AI has emerged as the top priority for technology spending, followed by cloud computing and Internet of things. Within AI, most Companies focus their budgets either Software and services, or on Training personnel, while few focus equally on both. This somewhat polarised focus is a result of nature of business and indicates the increasing demand for both AI software and services as well as personnel.

AI-Related Service Market

AI spend on IT services is expected faster than AI spend on Hardware or Software between 2022 and 2032. Revenue from AI focussed IT services is expected to be USD 22Bn by 2027 and USD 86Bn by 2032. Key Service offerings in the Gen-AI space include Prompt engineering, Data engineering, Intelligent App integration and Orchestration, as well as Responsible AI system integrations. This surge in AI adoption presents a significant opportunity for IT services companies not just to participate but to actively shape the AI landscape.

While it is still early days and large-scale adoption is still some time away, companies are seeing rise in demand from customers to integrate AI into their portfolio of offerings, presenting immediate cross-sell opportunities. Further, cannibalisation of other services, at least to some extent, cannot be ruled out creating an ‘eat or be eaten’ situation for incumbents. CEOs, feeling the pressure to develop AI capabilities, are actively seeking such capabilities in potential targets, driving IT services companies to turn to Mergers and Acquisitions (M&A) for quick access to specialized talent and cutting-edge technologies. With lack of implementation skills being cited as the key inhibitor by a third of enterprises, M&A being perceived as a vital tool. M&A Enables companies to rapidly augment capabilities and therefore establish a strong market presence.

AI Related Software Market

Similarly, spend on AI software is also expected to grow rapidly to USD 59Bn in 2027 and USD 280Bn in 2032. Companies across verticals are looking to add AI capabilities to improve their offerings and gain a competitive edge. It is seen as an efficient way to differentiate offerings and gain customer retention. Moreover, in today’s fast-paced environment, software providers see the need for continuous innovation and product development to improve customer offerings. AI’s increasing popularity is making it increasingly important to integrate AI-powered elements to one’s software to remain relevant in end customer’s perception. These demand pressures combined with a large commitment of resources and time required to develop AI software in-house make acquiring use-case specific AI software and simply integrating it into a company’s own offerings and processes attractive.

Conversely, companies with existing AI capabilities are actively seeking strategic support to ride the wave of rapid growth. As they develop the technical strength and accelerators for efficient AI software creation and deployment, collaboration with larger platforms not only creates opportunity through market access and sales but also provides the necessary structure and management support to efficiently drive rapid growth.

M&A Activity to pick up rapidly in this space

In this swiftly evolving landscape, M&A activity in Digital Transformation and AI is set to increase. Focusing on Capability augmentation and coupled with elevated interest rates and the fact that the space is relatively new, acquirers are gravitating towards smaller, fast-growing scalable targets. The ease and speed of executing such transactions make them attractive strategies. Another notable trend is the rise of cross-border deals driven by the pursuit of talent which is seen in pockets around the world.

Recent examples, such as Ascendion's acquisition of Nitor Infotech, a product engineering company with expertise in Gen-AI capabilities,  Datadog’s acquisition of Codiga, a company using AI to promptly identify and resolve errors during development; the Brandtech Group’s acquisition of Jellyfish, an agency that uses AI to craft tailored ads; and Thomson Reuters’ acquisition of Casetext, an AI powered legal research assistant, underscore the success of M&A in the AI adoption realm. Companies offering deployment services for major AI software platforms, such as Copilot, Joule, and creating custom AI tools development services, are poised to be in high demand.

As the AI landscape matures and businesses strive to stay ahead of the curve, M&A in the digital transformation and AI domain is set to grow. This reflects the strategic imperative for organizations to harness the power of AI for sustainable growth and innovation in an ever-evolving technological landscape.

With lack of implementation skills being cited as the key inhibitor by a third of enterprises, M&A being perceived as a vital tool. M&A Enables companies to rapidly augment capabilities and therefore establish a strong market presence.

Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.