Buyers prioritising AI-enabled targets, as defensibility becomes core concern

Buyers are increasingly prioritising AI-enabled targets in their M&A processes, while the proliferation of AI tools drives a re-evaluation of how companies can futureproof their operations to achieve AI defensibility.

AI defensibility refers to how durable a business’ economic returns and competitive advantage are in the face of the disruption AI generates in its industry. The term considers the impact of AI on a business’ long-term market position and enterprise value, rather than merely focusing on whether the company uses AI.

In an M&A context, this is leading to a major rethink of what makes a target competitively defensible and how this impacts its enterprise value. However, a new report from KPMG has demonstrated diverse opinions over what exactly makes a business AI defensible.

The report explored how private equity firms are gaining advantage by becoming increasingly sophisticated in assessing AI defensibility, as they seek to find durable advantages unlikely to be rapidly eroded by the advancement of AI.

Respondents cited a range of top-billed items, with the report noting that this may lead to valuations for technology-forward firms becoming less predictable in the future.

Slightly more than two-in-five respondents (42 per cent) said that they were now prioritising AI-enabled targets. However, while two characteristics were identified as being priorities among dealmakers, opinions differed considerably beyond this.

The two top-billed items named by respondents were regulatory, compliance, or security barriers (cited by 55 per cent) and deep workflow integration/system-of-action capabilities (cited by 52 per cent).

Other leading considerations included domain-specific human expertise (36 per cent), proprietary data/feedback loops that continuously improve systems (34 per cent) and multi-modal or proprietary IP at the orchestration layer (28 per cent).

These were followed by high switching costs (26 per cent), network effects (17 per cent) and outcome-based pricing (15 per cent).

Despite the growing prevalence of AI and AI defensibility as M&A considerations, the report stated that legacy diligence frameworks and valuation assumptions are not designed to account for the growing influence that AI has on future performance.

With 36 per cent saying that diverse AI-related considerations were influencing valuation more than target selection, KPMG notes that this could lead to a market in which pricing volatility increases the risk of investments, impacting both buyers and sellers.

KPMG wrote: “There is no established approach for incorporating its impact on target defensibility into diligence, valuation and investment thesis development. As AI reshapes the drivers of business value, dealmakers should consider a more structured way to assess whether a target’s competitive advantage can endure.”

Read more about how AI is shaping M&A:
Legal pros expect AI to drive most M&A processes within 10 years

AI in M&A: How can buyers and sellers harness the technology?

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