Why conglomerates buy tech firms

Dennis Uy-led Chealsea Logistics Holdings Corp. recently announced that it’s looking at developing its own e-commerce platform which may be launched within the next two to three years, while LBC likewise announced that it is acquiring majority stake in e-commerce firm QUADX.

Early this year, conglomerate Ayala Corp. acquired a controlling stake in Merlin Solar Technologies, Inc., a Silicon Valley-based firm that has developed “disruptive” solar farming technology whose operations can be scaled up by a manufacturing hub in the Philippines. Other local conglomerates in retail and banking quietly bought smaller tech companies in order to gain capabilities in last-mile logistics and fintech.

This wave of tech-buying frenzy is just starting in the Philippines and will continue in the coming years. In fact, our country has just started to follow this trend which began a couple of years ago with other global conglomerates, and the examples span many industries.

The New York Times reported early last year that “Walmart purchased the e-commerce start-up Jet.com, while General Electric agreed to buy ServiceMax, whose software provides information about off-site workers and equipment repairs. Roper Technologies, another century-old industrial conglomerate, signed a deal with Deltek, an enterprisesoftware provider. Automakers such as General Motors and Daimler have taken large stakes in ride-sharing applications, including Lyft and Hailo.”

Moreover in 2016, “the number of technology companies sold to non-tech companies surpassed those acquired by tech companies for the first time since the Internet era began, according to data compiled by Bloomberg. Excluding private equity buyers, 682 tech companies were purchased by a company in an industry other than technology, while 655 were acquired by tech companies, Bloomberg’s data showed.”

This global and local trend reflects how technology is radically changing many traditional businesses. Developments in e-commerce, big data, Internetof-Things, and the now-favorite blockchain are changing business models and disrupting the way organizations operate. Many companies have tried building these capabilities in-house through their IT departments but has proven to be difficult, as tech start-ups leapfrog industry models.

The New York Times report quoted Anthony Armstrong, co-head of technology mergers and acquisitions at Morgan Stanley, who said that “There’s no doubt that many non-tech companies have tried to build and have made the determination that it’s enormously challenging. It’s better to acquire disruptive technology than to be disrupted by that technology.”

One advantage of acquiring tech firms and start-ups, apart from the technology assets they have, is that they are naturally nimble, flexible, and innovative. Conglomerates can take advantage of these properties to develop and launch new products and services or improve customer experience in a quick manner.

Another is the opportunity for large conglomerates to change their culture, through cross-pollination and assimilation. Senior executives get to witness and learn how tech companies are managed, giving them insights on how to model culture change in their larger parent companies.

This trend will just continue to spread in the country like wildfire, as business leaders feel the disruptive impact of technology and new startup competitors.

***** The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.The author may be emailed at rey.lugtu@hungryworkhorse.com.

The author is President & CEO of Hungry Workshorse Consultancy, Inc., a digital and culture transformation firm. He is the Chairman of the ICT Committee of the Financial Executives Institute of the Philippines (FINEX). He teaches strategic management in the MBA Program of De La Salle University. He is also an Adjunct Faculty of the Asian Institute of Management.