Complex cross-border challenges change nature of technology transactions
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A combination of regulatory barriers, market uncertainty and the sheer scale of the challenges businesses face is driving a wave of tech transactions that look very different to the norms of recent years.
Technology has been one of the main drivers of M&A for more than a decade. Through the early years of the 21st century tech companies snapped up other innovative businesses to fuel their expansion into telecoms, navigation, streaming and healthcare.
But as their influence has grown, governments and regulators around the world have looked to limit their power, using antitrust and consumer protection laws to intervene in megadeals and investigate bids for smaller companies that they suspect may be stifling competition.
Many countries have in recent years also implemented tighter national security controls to restrict foreign investments in sensitive technologies such as AI which, have dual commercial and military applications.
More recently the tech sector has been buffeted by high-profile failures and the collapse of specialist lenders. At the same time, macro headwinds have reduced startup valuations, while rising interest rates have driven institutional capital into safer asset classes, stemmed the flow of syndicated loans for leveraged buyouts, and contributed to an overall slowdown in venture capital investing.
How issues such as climate change are driving cross-sector collaboration deals
These factors – coupled with the sheer scale and complexity of challenges such as climate change – are combining to change the shape of technology deal-making.
In the past, industries such as energy, mining, shipping and manufacturing typically focused on organic innovation, but the emergence of transformational technologies such as robotics, data analytics – and more recently AI and quantum computing – necessitated a shift in focus.
For years, tech acquisitions were traditional companies’ preferred approach, but today many are pursuing strategies more akin to VC investing, placing multiple bets via minority stakes in areas where the path to success is unclear, such as cutting-edge energy solutions.
Perhaps the more significant trend however is the rise of cross-sector, cross-border collaboration deals through which businesses pool expertise to develop systems that have applications in a range of settings.
Joint development deals can help participants prove concepts with less financial risk, and then scale up their operations once they know the technology works.
This dynamic is influenced by macro conditions; in stronger markets companies may be more willing (and able) to pursue buyouts, but in less certain times they often prefer to stay closer to their core competencies. Joint development deals can help participants prove concepts with less financial risk, and then scale up their activities once they know the technology works.
In some parts of the world – including the Middle East, Africa and to a lesser degree Europe - we are also seeing governments and/or state-owned enterprises launch strategic collaborations with tech companies, for example as they try to boost cloud adoption by creating new ecosystems at country level.
What are the main considerations for parties considering collaboration deals?
While every collaboration deal is unique, there are a range of strategic, legal and cultural considerations that parties should consider from the outset.
- On the strategic side, the most successful tech collaborations start with a thorough analysis of the “why”, which then governs how the relationship should operate. Here there are a multitude of potential structures available, from single-purpose contracts such as licence agreements, to alliances (where no equity interests are involved) and joint ventures (which do involve equity contributions).
- It’s also vital to understand your potential counterparty, their motivations for the deal and their likely stance in negotiations. Bigger tech companies will have significant resources and leverage, while a founder-led company will be leaner and potentially make faster decisions. With startups you’re likely to be engaging with senior who have a bigger emotional stake in the business, which will influence the dynamics of any discussions.
- Legal due diligence also plays a critical role in deal structuring. Here, the key issues are likely to involve IP rights, regulatory risk, employment considerations and liability management. Different IP rights will apply depending on the assets in question; patents for example safeguard novel, inventive and non-obvious inventions made by humans and typically attach to hardware. Copyrights require the demonstration of creativity, originality and the presence of a human author, and are used to protect software (including algorithms provided they have been converted into source code).
- What is each party bringing to the relationship, and on what terms will any background (ie pre-existing) IP be shared? This will have a big impact on transaction structure – a JV for example enables parties to license background IP to the new entity and control its onward use through their role as shareholders.
- Sophisticated regulatory analysis must be overlaid on to IP considerations. Data is often at the heart of innovative collaborations and JVs, with issues such as data ownership and the allocation of exploitation rights among the parties critical to the success of the partnership.
What happens to foreground IP (ie innovations developed through the collaboration)? Will this belong to one party and made available under license? How will any future upside in jointly developed IP be shared (ie through milestone payments or royalties)?
What are the rights of the parties in relation to improvements to background IP developed through the relationship, particularly if those improvements were made independently? If generative AI is involved in developing any outputs, what IP protections might be available here? What arrangements will apply to any data generated through the relationship? Where will any IP and data rights reside when the collaboration comes to an end?
Here, the regulatory focus must be forward-looking – are there any developments on the horizon that might impact future use cases? Again, a JV can help mitigate parent company risk by ringfencing responsibility for regulatory compliance.
- Depending on the counterparty, restrictive covenants may also be a factor. If a product or service is developed through the collaboration, can the service provider sell or license anything similar to its partner’s competitors? Can the service provider set up a separate business line based on the customer’s data? Non-competes are a hot topic of debate in the tech industry - does the service provider insist on a no-poaching clause in an attempt to protect its workforce, and if so is this enforceable?
- Cultural considerations also need to be taken into account. Bigger tech companies will have significant resources and as well as sophisticated IP strategies and controls. However they may lack experience in certain regulated sectors, and like any large business may operate in silos.
Startups typically have leaner teams (particularly in legal) less robust compliance frameworks and less well-developed IP protections. They will almost certainly be more nimble but look out for “key person” risk – are there individuals without whom the partnership would be worthless?
If so, what can be done in terms of compensation (e.g. equity plans), lock-ups or governance structures to keep them incentivised and on board? Will the cultures of the two businesses integrate effectively? If one partner is used to quick decisions and limited bureaucracy, what can be done manage any dissonance?
As a general rule, any business looking to enter into a collaboration with a tech company must consider each potential partner separately. There is no “one size fits all” approach and each will present different risks and challenges.
It’s important to think carefully about each party’s contribution to the partnership, as they may have a different view on the value of particular IP or data assets.
Deals should be structured with a view on the full collaboration life-cycle – what’s the rationale, where does the value lie, how can the deal be designed to achieve the desired outcome and what happens when it ends? Parties should also consider how they might exit the relationship early if necessary.
Deals should be structured with a view on the full collaboration life-cycle: what’s the rationale, where does the value lie, and what happens when the relationship comes to an end?
What are the keys to negotiating a successful collaboration deal?
Collaborations can be heavily negotiated so a focused, rigorous process helps. Parties should consider working in sprints and meeting in person – but only if the numbers are manageable.
Any internal due diligence should be conducted before negotiations start, and during talks, parties should consider separate discussions on the IP agreement and overall collaboration contract while keeping core teams on both sides.
Collaboration deals can be complex and a perfect outcome may not be possible, so it’s important to stay focused on finding pragmatic solutions. At the same time parties must accept a degree of uncertainty – there will inevitably be grey areas, but also structures that limit potential liabilities.
Finally, cultivating a collaboration requires a different mindset to a pure M&A deal – JVs and partnerships are long-term arrangements, so maintaining a productive relationship is critical.