How M&A will play a pivotal role in realising data's value

The bottom line? Data has become the bedrock of business value and the vital fuel for growth. But what does this mean for M&A activity? 

Over the past 20 years, the “data stack” has evolved a long way from the single-component, costly, on-premise data warehouses of the past. These had severe limitations. Crucially, they were difficult to access, and couldn’t facilitate in-depth analytics on multi-faceted, cloud-based data warehouses operating as part of a platform.

Fast-forward to today, and the data management landscape looks very different. True, the data warehouse is still at the center. But everything around it has changed. There are now a whole host of players in the ecosystem offering SaaS-based solutions for data integration (Fivetran, Airbyte, Stitch), event tracking (Segment, Snowplow, Rudderstack), transformation (dbt), AI (Continual), BI/Analytics (Looker, Mode, Tableau), Reverse ETL (Census, Hightouch), and Governance (Alation, Stemma, Monte Carlo, Metaplan).

The proliferation of players reflects the headlong growth in this segment, with the new entrants fueled by the infusion of massive amounts of capital, and innovation racing ahead at pace.

The relevance of all this to deals? Take the way the ecosystem has changed as the data stack evolves, add the ongoing rapid advances in technology, and you reach the conclusion: that one of the most effective ways for existing data management players to stay ahead of the technology curve and grow their competitive advantage is through M&A.

The current environment has also attracted private equity because of the high growth projections and potential exit opportunities – set against a backdrop of rocketing M&A valuations and sky-high multiples, most notably in the tech sector. Across the broader data management and analytics space, CBInsights has identified 36 current “unicorns,” defined as private companies valued at above US$1bn. What’s clear is that private equity firms will continue to seek value in data management/integration deals – and will look to accelerate growth rates until their ultimate exit.

All of this is happening in a data integration and management sector that’s still relatively nascent and heavily segmented as well as fast-growing. IDC projects that the total data integration and intelligence market will grow by 7.8% annually over the next four years to reach US$10.5 billion, with nearly all of that growth coming from cloud-based software. Such rapid growth in a segmented market provides ideal conditions for M&A activity – especially by legacy players who previously benefited from the first mover advantage, but have since seen their market share erode as customers’ demands have evolved. 

A further factor is that the sector is continuing to experience a rapid influx of new entrants – a trend that’s likely to lead to even greater segmentation in the short run and more consolidation in the long run. At the latest count, there are now over 1000 Global Unicorns and Decacorns per Vicki Huff (Partner, PwC US) in her article, “Living in a world of Unicorns”.The smaller specialized players in the market know they must adapt to compete, and one of the most efficient ways this can occur is through M&A activity. There will always be a need for specialized players in any sector, but if data management follows the path of related industries, the overall number of specialized players will decline over time.

Meanwhile, the market leaders – and well-funded challengers – in the data management sector have deep financial resources, making M&A a more attractive pathway to growth by purchasing technology rather than developing it. Their likely acquisition targets? The smaller, specialized companies mentioned earlier. The synergies available from acquiring and integrating these specialized players will be all the greater because of the potential for economies of scale.

Larger players will need to take care in pursuing these opportunities: The integration of companies offering different software solutions can be cumbersome and risky. But for the up-and-coming challengers that can navigate the complexity of an integration to execute efficiently and bolster their vision, acquisition offers a fast-track route to higher growth and scale.

As the data stack continues to evolve, we anticipate that we’ll see rising innovation – and ultimately M&A – in three areas in particular:

• Artificial intelligence: enabling AI is a huge growth opportunity for many businesses, and the data stack is a logical landing-spot for an AI platform.
• Data sharing: enabling data to be shared via the stack instead of requiring the build of custom APIs.
• Data governance: this will be of critical importance to large enterprises with a multitude of disparate datasets to manage and analyze.