Spring 2020: Impact of COVID-19 on IoT M&A

IoT Deal Value and Volume¹

The economic impact of COVID-19 is expected to be considerable. Its effects on M&A markets are well underway and proving to be equally dramatic, as can be seen on the charts below. In addition to helping current IoT clients navigate this environment, we are having regular discussions with the M&A teams at larger operating companies and leading private equity firms who are focused on IoT. As a result, we are gathering insights around deal activity in general and specific information that is painting a picture of the current IoT M&A markets, how those markets are trending, and what deal professionals anticipate in the coming months and quarters.

There are two themes that summarize what we are seeing and hearing, and what the future may hold for M&A in IoT.

First, the significant challenges facing the broader M&A market are impacting, and will continue to impact, IoT M&A as well. Credit in support of transactions has become more difficult to access, resulting in larger deals (approx. $500 million and up), which typically rely on leverage as a critical part of deal structure, being paused or shut down altogether. Our sense is that some smaller transactions (sub-$200 million) will continue to happen, though at a much slower pace and likely within new valuation parameters. (That is to say the lofty IoT M&A multiples witnessed for several years through 2019 are under pressure.)

Second, based on our discussions with larger companies in the space, we believe there are certain IoT end markets that will continue to see some level of strategic activity during the broad market slowdown. We believe government and critical industry companies (e.g., healthcare service providers, transport/trucking/package delivery companies, and broadband services providers, to name a few) will look to leverage IoT applications targeting areas such as patient care, healthcare provider asset tracking, med tech manufacturing, site smart access, hygiene, contact tracing, and fleet management. As a result, we expect larger IoT solutions providers to selectively target technologies and solutions to bolster their IoT related offerings. Further, private equity firms have over a trillion dollars in dry powder that they remain eager to put to work. Market volatility often allows them to approach valuation with more leverage than they may have wielded a year ago. In short, we believe the next several quarters could prove to be quite interesting for acquirers in the IoT space.

Impact of COVID-19 on IoT

COVID-19 has shined a light on several issues that could be mitigated or resolved through IoT technologies that enable the collection of real-time data and the creation of actionable insights. One of the main issues is the lack of data showing where to deploy resources and whether current protocols are effective.

Below, we have summarized relevant use cases highlighting how IoT is being leveraged to combat COVID-19. While these IoT use cases are being utilized to resolve immediate issues, these technologies will have a long-term impact (post-COVID-19) to limit the spread of existing and future diseases.

• Smart sink to maintain hygiene: Soapy Care, an Israel-based start-up, has developed a smart sink that uses IoT sensors to dispense the exact amount of soap or sanitizer, and control quantity and temperature of water required to properly wash hands. The sink offers different settings for homes, restaurants, day care and senior centers, and other environments.
• IoT to drive intelligent manufacturing: Haier Smart Home managed to fulfill 99.8% of its orders through February 2020, the peak of the pandemic in China. The company was an early adopter of intelligent manufacturing, including automated boxing, bagging, visual product inspections, and augmented reality (AR) testing. These steps enabled the company to maintain production with limited staff and provide important supplies to its customers in the midst of COVID-19.
• Use of automated technologies to control cross-infection: Multiple companies are using automated technologies such as disinfecting robots, smart helmets, thermal camera-equipped drones, and advanced facial recognition software for contactless delivery, spraying disinfectants, and performing basic diagnostic functions to limit the risk of cross-infection. These technologies will be applicable to other industries for improving security and delivery, and creating more sanitary environments.
• Thermal imaging CCTV and facial recognition: A security services provider has developed a CCTV camera integrated with thermal imaging and facial recognition systems to identify and detect body temperatures of a large number of people and send alerts to relevant personnel, if required. Such tools could be used in high-risk populations, such as nursing homes, during flu seasons or to check patients without having to come into close contact.
• Automated patrolling: A smart city IoT products and services provider has added capabilities such as cameras and infrared thermometers to its police patrol robots, which helps first responders conduct disease prevention inspections. Patrol robots integrate IoT, AI, cloud computing, and big data to conduct environmental sensing, dynamic decision-making, and autonomous motion control. This application could be used to avoid putting first responders in dangerous situations.