Media & Tech Tuesday - Record year for Smart Home M&A

Nest Labs’ sale to Google for $3.2bn. in early January fired the starting gun for an highly active year of technology M&A and at the same time put the phrase ‘Smart Home’ in the mind of every tech investor, somewhere between the ‘internet of things’ and ‘ten-bagger’.

Activity in the smart home industry has continued with 12 more deals following Nest / Google (table below), totalling $4.1bn. of disclosed transaction value.

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Key themes

The high level of activity in technology generally, and the reasons for it – convergence of technologies, elevated valuations in public & private markets, resource scarcity – are clear from the headlines.

Looking at the smart home segment specifically we think three important themes emerge from activity so far:

  • Devices are king
    Both acquisition and investment activity is focused on devices – things that do something, like a thermostat or camera – rather than platforms, such as home automation network ‘hubs’.  A significant number of companies that have set about building entire smart home ecosystems – including suites of devices, hubs, and cloud operating platforms.  These may yet attract strategic acquirers seeking a fully developed platform to enter the market.  However this trend could be an early sign that in a market of increasingly interoperable devices value may be driven by clear category leadership rather than waterfront-coverage.
  • Standards still to play for
    Deals completed this year span the full range of smart home protocols – WiFi, Z-Wave, ZigBee, and more.  No standard has emerged as clearly dominant in either the consumer market or M&A activity.  Whilst several platforms have adopted a standard-agnostic stance by supporting several protocols, in our view the inherent inefficiency of supporting parallel, incompatible devices in the same networks still favours eventual standards convergence.
  • OEMs activity muted
    Makers of existing home devices or systems – OEMs – are notable by their rarity.  Whilst Samsung clearly saw value in acquiring a suite of capabilities in SmartThings, other OEMs are either opting to develop their capabilities internally or have yet to make their move.

Outlook

As penetration of Smart Home devices continues to rise, revenues grow and an increasing proportion of companies become significantly profitable and cash generative, we would expect M&A activity to continue, with a number of important changes in emphasis:

  • More horizontal transactions
    Activity so far has been polarised between larger buy-outs by strategic acquirers, usually using an acquisition to enter a new market, and smaller venture or development capital investments.  Deals between peers in the industry have been rare.  As the home automation industry matures, winners will emerge, become financially stronger, and we would expect to see a number of horizontal deals.
  • Attrition through standardisation
    As protocols converge to a smaller number of de facto standards, a number of system and device makers will either exit the market or be acquired in distress.  This consolidation will present opportunity for the winners from standardisation, but may lead to losses for investors in businesses caught on the wrong side of standards convergence.
  • Rise of the OEM
    Whether through direct M&A or indirectly through their strategies in the consumer market, established OEMs will play a significant role in shaping activity in the smart home industry.  As uptake of home automation networks increases and consumers come to expect smart home functionality to be integrated as a matter of course into a wide range of devices, OEMs will not have the option to wait-and-see.

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