This article first appeared in Forum, The Edge Malaysia Weekly on January 20, 2025 - January 26, 2025

There are two ways to gain competitive advantage. Build it internally (an organic approach), or acquire it through buying tech from someone else or through mergers and acquisitions (M&A) of another, often smaller, company. Eat lunch or be lunch.

How you fund the acquisition of new technology is a key strategy in itself. Most tech companies fund acquisitions through internal revenue or cash flow, and some do this through borrowing or through initial public offerings (IPO). Listed companies have the advantage of acquiring technology through a mix of equity and cash.

Relying on IPOs is a strategic move for a tech start-up, but public listings can be delayed due the need to generate top-line growth and bottom-line profitability. Investors are also wary of “stir-fried” IPOs, whereby tech companies overstate their technology depth and staying power to generate future profits. Traditional organic growth such as rising research and development (R&D) cost, rapid technology turnover and the growing demands of a diverse global customer base may be too slow. Through M&A, tech companies can gain immediate access to cutting-edge technologies, specialised intellectual property (IP) and skilled talent, enabling them to innovate faster and maintain a competitive edge in the race for the next big thing.

In the age of artificial intelligence (AI), which is transformative for the tech industry in particular, many companies can no longer afford to grow organically. Two trends are helping the M&A business. First, the private equity sector has many start-up companies in their portfolio that are waiting to exit, so they are in the mood to sell. Second, smart corporate leaders see the opportunity to acquire those that fit their own growth plans to acquire talent, intellectual property rights (IPR) or new distribution channels.

In the mid-1960s and 1970s, many tech companies in the Silicon Valley, California, celebrated their going-public (IPO) days with legendary stories of instant wealth for an executive, brilliant scientist and, sometimes, a rare secretary or low-level worker who received early stock options. With this new-found wealth, Silicon Valley’s streets were filled with high-end cars such as BMWs, Porsches or Lamborghinis. These sophisticated vehicles’ advanced engineering and high performance reflected also the valley’s value-innovation. Thus, tech companies with new-found wealth started identifying and acquiring next-generation tech start-ups capable of delivering superior innovations and products.

In the Silicon Valley, big-tech companies used their substantial cash reserves (since many didn’t pay high dividends) to acquire high-growth start-ups, enabling faster growth and innovation. According to Mind the Bridge Tech Startup M&A 2024 report, the valley’s tech companies dominate global start-up acquisitions, with four tech giants (Apple, Microsoft, Amazon and Alphabet) having collectively invested US$84 billion (RM378 billion), or 28% of the top 25 tech firms’ total M&A spending. The reason these tech giants are so eager to purchase start-ups goes beyond just growing their money. They have realised that they can acquire the key human talent with the right experience to generate new ideas, innovations and market creativity while avoiding the stagnation and rigidity that can creep into large companies over time. If you can’t think out of the box, hire or acquire someone who can.

Intel’s decline from being a tech industry leader in innovation to a company plagued by billion-dollar missteps is often cited as a cautionary tale for corporate leaders. Striking examples of its faltering were its inability to recognise the strategic importance of mobile chips, advanced foundry technology, and the AI market due to the inherent resistance of immense layers of bureaucracy in legacy companies to make bold strategic pivots. Intel’s missteps are reminiscent of Japanese giant Sony’s inability to build its iPhone equivalent, when it had all the technology in phones, cameras, movie and music content, and manufacturing skills. In contrast to Intel, Nvidia proactively sought AI start-ups through partnership and acquisition, driving its market cap to grow at a compound annual growth rate of 77% from 2014 to 2024, whereas Intel’s market cap declined by an average of 6.5% annually over the same period.

Intel’s successors forgot its legendary leader Andy Grove’s dictum that “only the paranoid survive”.

Based on the 2020-2024 weighted average revenue growth of the top five American tech companies (15.9% per annum), they expanded their tech revenue bases very quickly. Apple and Amazon’s large revenues had the biggest impact on the groups’ overall performance, while Nvidia’s strategy of high growth rates added volatility but upward momentum to create a positive narrative of a major beneficiary from the AI revolution. Nvidia’s revenue growth is driven by its strategic M&A of AI start-ups to bring in new ideas, talent and technologies to strengthen core competence. These acquisitions enabled Nvidia to enhance its AI chips, reducing the cost of computational work by half every 2½ years and also making its hardware cheaper.

US AI start-ups are not only attractive to domestic big tech but also to foreign tech companies, particularly the Chinese Baidu, Alibaba and Tencent (BAT) tech platforms. They have been major buyers of US AI companies to enhance their existing capabilities in critical AI fields, particularly gaining access to cutting-edge technologies and high-quality engineers, who are difficult to groom or recruit domestically in China. These foreign purchases also risk IP transfer to China, since AI technologies have dual-use applications in the military and strategic context. BAT’s weighted average revenue growth of 11.6% is nearly 73% of the US top five’s average growth during the same period.

Given the US-China competition for AI leadership, India and Israel have become key acquisition targets for global tech giants due to their vibrant AI markets. India, known as Digital India, is a fertile ground for scalable tech start-ups with her large and growing pool of affordable, highly skilled engineers. This makes India attractive for M&A, as tech giants seek to scale operations at lower costs. Meanwhile, Israel, known as the Start-up Nation, is famous for its deep innovation in specialised tech fields like AI and cloud computing. Its strong focus on R&D makes it an appealing destination for tech companies seeking proprietary IP and niche expertise. The Gaza war also has resulted in many Israeli companies and talent seeking exits to larger markets like the US and Europe.

Tech giants use M&A not just to consolidate their market dominance in global markets but also to expand into adjacent markets. While Southeast Asia’s tech is growing, it is heavily concentrated on tech equipment manufacturing, with relatively little focus on advanced AI research due to lack of deep R&D infrastructure, venture capital funding and skilled talent pools. Since foreign investments are the major source of tech funding in the Asean region, the global tech platforms are all beginning to allocate a portion of their capital to support tech start-ups within the region to ensure that they have access not only to markets, talent and local innovation, but also cheap energy. The reality, however, is that there is still a substantial gap in technology and IPR between the market leaders in China, the US, Europe and Northeast Asia and the rest of the world.

For many start-up founders, being bought out is often seen as a validation of success and a means of achieving financial aspirations. For venture capitalists, M&A is a critical exit strategy to collect the return on their investments, especially in cases where IPOs are not immediately feasible. We can therefore expect a growing market in M&A, as the market weeds out the weaker companies and starts grooming local champions that have possible regional and global reach.

Tech markets operate on scaling. If you don’t grow your customer base or revenue to reach take-off scale, your valuation will either stagnate or decline. Tech markets are not for the faint-hearted. Patient capital is needed with a deep understanding of the risks and pitfalls of entering markets too early or too late. Ultimately, you need deep pockets and steely nerves to ride out the vagaries of tech cycles in an era of unpredictable sanctions and tech break-outs from unseen quarters. Who said the market is not cruel?

Tan Sri Andrew Sheng writes on Asian global issues. Loh Peixin is a research associate at the George Town Institute of Open and Advanced Studies, Wawasan Open University. The authors are engaged in a major study of the tech industry in Penang.

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