Artificial Intelligence: Evaluating M&A Deals
The M&A market has been hot with acquisition of AI companies, most companies now view AI as essential, existential and table stakes. The two main drivers of these deals have been:
(1) Fill gaps in or enhance capabilities of their existing technology stacks
(2) Race to acquire AI talent for the future i.e., acqui-hire transaction
The valuations have been high and driven by strategic rationale, immediacy of needs, speed to market, timing and seller expectations.
AI companies come in a variety of flavors e.g., some of the legacy big data folks now rebranding themselves as AI with highly optimized rules, but far from being truly cognitive in their capabilities. These companies are also in various stages of the life cycle e.g., one having just the vision and talent, some have IP, others have a viable product, few have paying customers and a very limited universe of standalone AI start-ups have operating profit and scale. IP valuations can get contentious with proprietary technology and algorithms having no standard value measurements with patents enhancing value.
Founders and CEOs of AI companies know that they must focus their pitch on strategic valuation rather than traditional valuation drivers like sales, EBITDA or even ARR multiples today. Most traditional…
