By Jay Snyder
While the proliferation of technology research and development (R&D) has enabled contractors to overcome some of the industry’s most persistent challenges, in some areas it has created a crowded field of competition. It has also revealed pockets of attractive market share, product capability, and skilled talent, which has spurred increasing interest for mergers and acquisitions (M&As). When technology companies merge or are acquired, the resulting changes can impact everything from product offerings and customer service to data security and privacy.
This article discusses how M&A can impact contractors, tips for how to predict which technologies are likely to merge or be acquired, and the impact of data migration or consolidation for customers.
WHY CONSTRUCTION TECHNOLOGY COMPANIES PURSUE M&A
Construction technology M&As create strategic advantages, leverage unique capabilities, or capitalize on synergies. Seeking deals that accelerate growth is common to expand customer base, technology offerings, geographic reach, and gain access to new markets. This can help them stay ahead of the curve and keep pace with the latest advancements in the industry.
By expanding their product offerings or entering new markets, companies can reduce their reliance on a single product or market, spreading the risk and creating new opportunities for growth. This can help weather downturns in the market and remain competitive in the long term.
Increased resources can provide increased financial and human resources, which can be used to improve product development, marketing, and customer support. This can help a company improve its operations, provide better products and services, and enhance the customer experience.
THE CUSTOMER IMPACT OF M&A
One of the primary ways that M&As can impact contractors is through changes to the products and services offered. After a merger or acquisition, a tech company may discontinue or phase out certain products or services that were previously offered, or it may combine the offerings of the two companies into a single product or service.
A well-known non-industry example was when Microsoft acquired Nokia’s mobile phone business in 2014. This merger led to the discontinuation of the Nokia brand and some of its mobile phone models. However, when Facebook acquired Oculus VR in 2014, it gained access to virtual reality technology that has been used to develop new products and services for its users.
Pricing & Contracts
There are also concerns about the effects on customer support. If a deal leads to staff reductions or changes in the structure of the customer support team, then contractors may experience longer wait times or other disruptions to the support they receive.
Additionally, the acquirer may have a different approach to customer service than the acquired company, and customers may notice a decline in the level of support they receive. Contractors should be aware of any changes to customer support and communicate all issues that may arise to their account representative as quickly as possible.
It is important for companies to communicate with their customers throughout the M&A process and to work to maintain a high level of customer service and support.
The Current State of Venture Capital Investment
The construction industry is one of the largest industries in the world, with about $10 trillion spent on construction-related goods and services each year.1
However, the industry has been slow to adopt technology and has traditionally been seen as resistant to change.
Still, the construction technology sector has been gaining traction, with venture capital investment pouring into the space. Venture capital investment in construction tech reached $3.1 billion in 2021, up from just $400 million in 2016.2
Forbes also states that the rise of construction tech has been driven, in part, by the increasing demand for infrastructure, the need to improve efficiency and productivity in the construction process, and the growing focus on sustainability and green building practices.3
Certainly, the pandemic has accelerated the adoption of technology in the construction industry, with many companies looking for ways to improve efficiency and reduce costs in response to the economic uncertainty caused by the pandemic.
1. “Reinventing Construction.” McKinsey Global Institute. mckinsey.com/~/media/mckinsey/business-functions/operations/our-insights/reinventing-construction-through-a-productivity-revolution/mgireinventing-construction-in-brief.pdf.
2. Azevedo, Mary Ann. “Investor momentum builds for construction tech.” TechCrunch. February 16, 2019. techcrunch.com/2019/02/16/investor-momentum-builds-for-construction-tech/?guccounter=1; TRD Staff. “A wave of venture capital is pouring into construction tech sector.” The Real Deal. July 3, 2019. therealdeal.com/national/2019/07/03/a-wave-of-venture-capital-is-pouring-into-construction-tech-sector.
3. Lynch, Catherine. “The Construction Industry Is Getting Greener: Why, How, And What’s Changing?” Forbes. August 25, 2021. forbes.com/sites/sap/2021/08/25/the-construction-industry-is-getting-greener-why-how-and-whats-changing/?sh=1fae271652bc.
KNOWING WHAT HAPPENS TO YOUR DATA
If the acquirer intends to continue operating the software as status quo, then the data may not be impacted and subject to the same terms and policies. However, if the M&A deal results in data migration or consolidation, then the tech company should provide customers with adequate notice and an opportunity to opt-out or request data deletion.
There are steps contractors can take to mitigate any negative impact. For instance, they can perform a data inventory to understand what data is being stored and where, review privacy policies, and negotiate data security and retention terms in acquisition agreements. It is essential to review the data ownership clauses of software agreements to understand how data is handled in the event of M&A. Contractors may also wish to contact their tech vendors’ customer support or sales teams to ask specific questions about how their data will be handled.
It is crucial for construction technology companies to be transparent with their customers about how data will be handled in the event of an acquisition. Failure to do so can lead to mistrust and frustration among customers, potentially damaging the reputation of the company and affecting future sales.
UNDERSTANDING CYBERSECURITY RISKS
Tech M&As can potentially increase cybersecurity risks for both the acquiring and the acquired companies and their customers. The integration of two technology systems or companies can create integration challenges that can cause cybersecurity gaps and vulnerabilities.
When companies merge, access controls may not be properly updated or adjusted and may include integrations with third-party applications or partners, potentially leading to unauthorized access to sensitive data or systems across products or solutions. Furthermore, inheriting older or legacy systems that may be less secure or not updated regularly can also increase the risk.
To mitigate cybersecurity risks, tech companies must take proactive measures such as updating access controls, monitoring third-party vendor relationships, and performing cybersecurity audits of the merged companies. Contractors can also establish cybersecurity policies and protocols to ensure that all employees are aware of the potential risks and know how to mitigate them. It is essential for everyone to pay attention to cybersecurity risks in technology M&As to protect sensitive data and prevent costly breaches.
An effective approach for contractors to mitigate contractual issues is to NEGOTIATE MULTIYEAR AGREEMENTS THAT LOCK IN PRICING and clearly stipulate escalation clauses.
MITIGATING CONCERNS OR ISSUES
It’s common for contractors to have concerns or issues related to change brought on by M&As, such as product offerings, pricing, and customer support. In addition to all of the specific recommendations mentioned previously, there are a number of ways to mitigate these concerns early on.
First, contractors should stay informed about any changes or updates related to the merger or acquisition such as changes in product offerings or customer support. Often, tech companies will communicate with customers through email, newsletters, or user forums, so it is important to check these regularly and ensure messages aren’t blocked by spam filters or “do not disturb” settings.
Also, form a close relationship with the assigned account representative of the tech company. Make it a point throughout the year to ask about changes to the business, including R&D and acquisitions.
Contractors should also review their contracts and terms with the tech company to understand any potential changes in pricing, service levels, or other terms.
An effective approach for contractors to mitigate contractual issues is to negotiate multiyear agreements that lock in pricing and clearly stipulate escalation clauses. In this situation, a technology company would need to terminate the agreement early and ask the customer to enter into a new agreement. If a contractor doesn’t want to negotiate a new agreement, then they will be in a better position to either keep the current contract in place or receive compensation for early termination, depending on the original contract language.
In general, if there are concerns, then contractors may consider renegotiating terms or seeking legal advice. It is important to be proactive in reviewing contracts to ensure you are protected in the event of changes that could have negative consequences.
Contractors may evaluate alternative products or services offered by other tech companies to determine if there are comparable or better options available that will allow you to avoid getting caught up in changes associated with M&A.
Finally, contractors can provide feedback to the tech company about any concerns or issues related to the merger or acquisition. This can help the tech vendors better understand the needs and preferences of its customers and potentially address any concerns or issues.
The Impact of a Recession on Technology
The impact of a recession on technology M&A can be mixed, with some companies seeing opportunities for growth while others are being more cautious. The state of the economy and the financial position of the companies involved are important factors that can influence the outcome of M&A deals during a recession.
McKinsey & Company has found that during a recession, overall M&A activity tends to decrease, including technology M&As.1 Companies may be more cautious about making big investments during times of economic uncertainty and may choose to hold off on M&A deals until the economy stabilizes. This hesitation can stem from a variety of factors including a lack of confidence in the economic outlook, concerns about financing deals, or a desire to focus on core business operations during uncertain times.
However, some companies may see a recession as an opportunity to acquire assets at a discount. If a tech company has the financial resources to weather the economic downturn, then it may be able to acquire distressed assets or struggling companies at a lower price.
During economic downturns, valuation and deal premiums should come down and companies may look to sell assets that they otherwise would not offer to the market. Those companies with liquidity and a stable revenue forecast are positioned to consider M&A as a part of their growth strategy, more than others.2
Companies may also shift their focus to defensive M&As rather than growth-oriented deals. Defensive M&A deals can help companies manage economic downturns and emerge stronger during a recovery. For example, a company may acquire a competitor to consolidate its market position or acquire technology that can help it reduce costs and improve efficiency.
Additionally, in a recession, stock prices and valuations can decrease, which can make it harder for companies to execute M&A deals. Sellers may be hesitant to accept lower valuations, and buyers may struggle to finance deals. Additionally, banks and other financial institutions may be less willing to lend money for M&A deals during a recession, making it harder for companies to finance transactions.
1. Giersberg, Jens; Krause, Jan; Rudnicki, Jeff; & West, Andy. “The power of through-cycle M&A.” McKinsey & Company. April 30, 2020. mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/the-power-of-through-cycle-m-and-a.
2. Salsberg, Brian. "The Case for M&A in a Downturn." Harvard Business Review. May 17, 2020.
DETERMINING IF A TECHNOLOGY IS LIKELY TO MERGE OR BE ACQUIRED
Construction technology is constantly evolving, with new technologies and companies emerging regularly. However, it can be difficult to predict which specific construction technologies are likely to merge or be acquired without access to the applicable companies’ proprietary information. Nonetheless, there are some ways to glean insights into potential M&As.
Industry publications, such as Construction Dive, Construction Executive, and Engineering News-Record as well as M&A reports from Madison Park Group regularly cover news and trends in the construction technology space including M&As. Monitoring these publications can provide insights into which technologies are receiving funding, attracting attention, and potentially ripe for acquisition.
Venture Capital Firms
Additionally, venture capital firms that specialize in investing in construction technology can provide insights into which technologies are receiving funding and which companies may be acquisition targets. Such firms and corporate strategic investors have a deep understanding of the construction technology space and can provide valuable insights into potential acquisition targets.
Conferences & Events
Attending industry conferences and events can also provide opportunities to network with industry leaders and learn about emerging technologies that may be attractive to potential acquirers. These events bring together industry leaders and innovators, providing valuable insights into the future of the construction technology space.
It’s important to note that while these sources for venture capital and M&A activity can provide insights into potential acquisition targets, they are not definitive M&A predictors in the construction technology space. M&As can be unpredictable and may occur for reasons beyond what is visible in the market. Nonetheless, monitoring these sources of information can help you stay informed about potential changes to the technology landscape and prepare accordingly.
Tech M&As can bring both positive and negative impacts for contractors. By sensing the early indications of such activity, you can take actions to ensure that your company reduces any disruption to the business and continues to have reliable, capable solutions in use.
To make the most of the potential benefits of tech M&As, contractors should be proactive in managing their technology agreements and developing relationships with their technology vendors. Staying informed about any changes or updates related to the merger or acquisition, reviewing contracts and terms, evaluating alternatives, and providing feedback, can help contractors better navigate the changes that may result from technology M&As while taking advantage of any potential benefits.
JAY SNYDER is President, and Principal of Big Blue Innovations (bigblueinnovations.com), offering advisory services to technology startups, technology consulting to contractors, and mergers and acquisitions planning, headquartered in Cary, NC. Jay has been in the engineering and construction industry for 23 years with experience which includes executing nearly $1 billion of construction as a project manager and executive, participating in the acquisition of tech startups, assisting with venture capital fundraising, advising contractor tech spinouts, and is a published author.
Jay can be reached at 919-692-6129 and firstname.lastname@example.org.
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