Why digital transformation is expected to drive M&A

The industry-wide shift towards digital transformation, fueled by AI-driven innovations dominating the market, is likely to advance dealmaking in 2025.

The new administration has announced its plan to promote technology advancement and digital innovation. The recent measures taken by the administration intend to advance the private sector’s ability to develop and deploy digital innovation.

Digital transformation is becoming a pressing need for businesses

The market has witnessed a major uptick in new tech solutions driven by artificial intelligence (AI) in recent years. These solutions are in demand, which is predominantly steered by businesses seeking to integrate AI in the value chain and customer services to achieve operational efficiencies and optimize operational processes.

While AI continues to dominate current market, US companies are actively seeking to explore more advanced digital capabilities. Many are finding ways to use AI to support for operations and an avenue for building new business models, creating new market share and exploring emerging revenue opportunities.

Data breach remain a consistent concern for AI use. This risk has led to businesses looking to enhance their expertise in cybersecurity to keep up with the lightning-speed of digital innovation. With the increased regulatory scrutiny on a global level, businesses are more motivated to make strategic acquisitions to integrate enhanced data protection practices and further build a more effective compliance framework.

Market is witnessing more strategic acquisitions to foster digital innovation

More businesses are tapping into digital advancements to bolster their presence in sectors like software and digital solutions. Instead of building in-house digital capabilities, more industry players are actively exploring strategic acquisitions, with domestic targets leading digital innovations and those overseas, to gain a competitive edge in these areas and build digital competencies. With the ever-growing demand for digital capabilities and the need for companies to develop their digital footprint, the market is expected to witness increased investment in businesses making strides in digital and tech solutions.

Businesses are leveraging M&A to develop their technological expertise and digitize their services and operations. Some businesses are focusing on building efficiencies within their operations, while others are leveraging technology innovations to develop data-driven products and services and reach consumers beyond their usual customer target. Through these efforts, companies are looking to enhance their valuation and increase the prospect for more favorable offers from potential buyers, leading to more movement in deal activity.

Industry-specific trends

• Healthcare and healthtech: The shift toward telemedicine, electronic health records, and personalized care is driving M&A. Hospitals and health systems are acquiring technology companies that offer digital diagnostics, remote monitoring, and data analytics to improve patient outcomes and reduce costs.
• Technology and software services: As demand for cloud computing, cybersecurity, and AI solutions grows, tech giants and software companies are actively acquiring smaller firms with specialized expertise to broaden their service offerings and enhance digital capabilities.
• Telecommunications: With the rollout of 5G and the increasing need for robust digital infrastructure, telecom companies are merging with or acquiring firms that provide network optimization, IoT solutions, and advanced connectivity services.
• Logistics and transportation: The rise of smart logistics, autonomous vehicles, and digital supply chain management is prompting companies to acquire technology providers to enhance efficiency and competitiveness in the rapidly evolving market.

Recent challenges facing digital innovation

Against the setting of digital transformation, energy consumption has stood out as an impending concern. As a result, data centers have shifted towards energy-efficient measures, such as advanced cooling systems, to foster green practices and also control the ever-growing operational costs. As a part of digital transformation efforts, cloud-based systems have gained crucial relevance. Motivated by the financial incentives, more companies are making a shift towards strategies intended to leverage cloud-based systems. Energy-efficient hardware designs and operating systems, and measures for optimization of IT infrastructure are being adopted as some of the green computing practices.

The recent tariff measures against imports from Canada, China and Mexico have made it challenging for businesses to boost innovative digital breakthroughs. The market faces the risk of supply chain disruptions. Tech sector will find it challenging to rely on the international market for sourcing digital components. As a result, companies face increased operational costs and delay in innovation efforts due to shift of costs from R&D to production.

Anticipated rebound in M&A activity

Despite a cautious start to 2025 due to market volatility and geopolitical uncertainties, dealmakers anticipate an increase in M&A activity later in the year. Factors contributing to this optimism include potential regulatory changes, economic conditions, and the strategic imperative for companies to adapt through acquisitions.

Conclusion

Navigating the complexities of digital transformation in M&A requires a coordinated approach involving collaboration with regulators, investment in robust cybersecurity infrastructure, and the development of agile strategies adaptable to changing political and regulatory landscapes. By proactively addressing these challenges, U.S. companies can effectively harness digital transformation to drive growth and maintain competitiveness in an evolving market.

This alert is for informational purposes only and does not constitute legal or business advice.