M&A Activity Across Robotics, Automation, AI & Health Tech

24 Feb, 2021

M&A Activity Across Robotics, Automation, AI & Health Tech

 

While M&A has been a strong tailwind since the inception of the ROBO index, 2020 was a banner year with 7 of the 86 members of the ROBO Index receiving takeover offers. Meanwhile, venture funding and exits reached record highs. In this webinar, we look at the data, follow the money and discuss key trends including the return of mega deals, the focus on software, healthcare technology and autonomous vehicles and the implications for investors.

 

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Webinar Transcript

Jeremie Capron:

Seven years ago, we put together a team of investment professionals and industry experts with that goal of designing investment strategies around what we believe to be the next technological revolution. We look at robotics and AI as a set of general-purpose technologies that can be applied to every industry, every market, very much like the internet revolution over the past 20 years. And we think this is offering tremendous investment opportunities. So today, there's a little more than four billion US dollars tracking our strategies primarily in the form of ETFs. The most notable is probably the ROBO Index, R-O-B-O, which was launched around seven years ago. Our research led us to realize that something important was happening in two adjacent areas that are the artificial intelligence and the healthcare technologies.

So we introduced two additional index portfolios. THNQ, that's THNQ, that's our artificial intelligence index, and also HTEC, which stands for Healthcare Technology and Innovation. That's another index portfolio that's been live in the market now for over a year. And these are not your traditional indices, our strategies are research-driven. We combine that research-driven approach with the benefits of index investing. So the portfolios are selections of best-in-class companies from around the world. There's small, mid, large caps. They are more or less equal-weighted.

It's a modified equal-weighting system that gives a strong representation to the smaller and mid-sized companies than traditional market cap-weighted indices. And the portfolios are very diverse. They have a very high active share relative to traditional broad equity indices. You'll find the overlap with the S&P 500 or an all-world equity index is very low. On the next slide, you can see that those strategies have had a very satisfactory performance since launched. 2020 in particular was a very strong year with double digits returns across the board. Please refer to the fact sheets of our indices on the website if you want more details. With that, I'm going to pass it on to my colleague, Lisa, to get started with a view on what's happening on the private side in venture capital.

 

Lisa Chai:

Thanks, Jeremie. 2020 was a record year for acquisitions of venture-backed companies. More than 1,500 companies were acquired for more than 149 billion. Within artificial intelligence technologies, what we're seeing is that global market leaders continue to acquire AI talent or AI startups. The past year was obviously a massive year of funding for robotics, AI, healthcare, and anything cloud-related driven by the COVID-19 pandemic that was really accelerated by the digital transformation initiatives. Fueled by disruptive innovations in AI, autonomous systems, genomics, and enterprise cloud, we anticipate this momentum to continue throughout 2021.

I'm going to share with you some of the notable findings from our M&A report that Jeremie indicated. The funding for early stage and late stage growth companies in the US continued its record climb with 130 billion up 14% year-over-year. We discovered that the most active fundings were in three segments; self-driving cars, FinTech, and digital health, ranking in record investments. According to CB Insights, over 40 early stage AI startups have raised a combined five billion in equity funding from investors. Also in 2020, there was also an acquisition spree of AI companies by Apple, Amazon, Cisco, and Microsoft since the pandemic started.

Most notably, Apple has acquired more AI startups than any other company. We have seen these large tech companies be pre-active in M&A before the pandemic, but it seemed to have really accelerated after the pandemic as well. Companies like Apple basically doubled down in their investments during this time. Another notable aspect is that as consumers spend more time at home, the larger tech companies are not just in acquisition mode, but are also actively participating in venture investing through their corporate venture arms. Startups acquired or invested by many of these large companies spanned everything from e-commerce to autonomous systems, to augmented reality, to AI video games.

During the year, some of the big exits of AI companies included Amazon acquiring Zoox, autonomous system provider, for 1.2 billion. And there were several key IPOs during the year in AI, like Lemonade, a FinTech provider, and C3.ai, enterprise AI company. Some of the other exciting funding news during the year was SpaceX, raised 2.4 billion, bringing the total funds raised to 4.5 billion. UiPath, a robotic process automation provider raised 1.2 billion. And autonomous ride hailing provider, Waymo One, raised 2.2 billion. China was also very active during the year where three of the top five mega raises were allocated to cloud-based technology companies in trucking, online learning, and online real estate.

These three investments alone combined were over 6.5 billion US dollars. China continues to be very acquisitive in bringing AI talent through acquisitions. In terms of European venture market, it declined slightly year-over-year. It really declined sharply when the pandemic started, but it bounced back nicely in second half of last year. So it seems to be on that upward trajectory. In healthcare, global healthcare funding reached new highs in 2020 of 80.6 billion across 5,500 deals. This increase represents a 41% growth over the prior year. VC funding was also pretty global across regions; North America, Asia, and Europe, with the largest increasing in Asia which was up about 70% year-over-year.

Digital health funding overall is really at all-time high at 27 billion. We'll go a little bit more into digital health later on the presentation. I want to just touch on a couple of things regarding the THNQ, THNQ strategy. As Jeremie indicated, it is our new strategy to join ROBO Global with its focus on artificial intelligence. Our index companies are enablers and users of AI and their aim is to go after massive revenue opportunities over the next decade as a spending in AI systems is poised to accelerate. Some of the key themes to highlight from the M&A report for THNQ.

THNQ Index members largely benefited from the COVID-19 pandemic and they were looking to aggressively leverage their presence and build capabilities and features. So for the most part, companies small and large spent their cash being acquirers then being acquired. Many of our companies in the past year are saying that top priority for capital allocation is M&A or increase their R&D spending. And that is exactly what they did. As buyers have unprecedented levels of cash in this low interest rate environment, and with some of our index members using their stock as levers to acquire AI talent, collectively, 55 of our 70 index members spent over $200 billion acquiring companies in the last 14 months.

That translates to 230 M&A deals that were announced by our index members. During the year, just three of our index members have had offers to be taken out in the past year. So we're seeing very active environment for acquisitions of AI and data management capabilities by our index members. This is not at all surprising as there has been this massive deployment of capital investment by enterprises around the world to take advantage of the cloud scalability and to build this modern IT architecture that you're hearing about. And you need that modern IT architecture to run the sophisticated AI systems.

Our index members want to really take this opportunity to be a part of the big technology build out that's happening over the coming years. Meanwhile, after deceleration of semiconductor M&A in 2019 due to the US-China trade war, semi deals bounced back strongly in 2020. They were four mega deals in semis during the year as the industry is consolidating once again and expanding into the future of high performance computing and AI. Software sector also continued its trend of mega deals in 2020 as the growing focus on adding software capabilities has only expanded. Many of these multibillion dollar cloud acquisitions are unsurprising as businesses around the world are on the race to move their data to the cloud.

So, few of the deals on the M&A. Grubhub, THNQ Index member, sold to Europe's food delivery company called Just Eat Takeaway for 7.3 billion. Salesforce announced their intent to acquire Slack for 28 billion, which was the largest deal in the company history. Twilio, a cloud communication software company acquired Segment for 3.2 billion to expand its API world, and they're providing tools to support software developers and adding various AI capabilities. A quick look at the portfolio construction. All 11 sub-sectors delivered strong returns driven by outstanding performance across the board, but particularly in e-commerce, cognitive computing, healthcare, and cloud providers in the last 12 months.

I think it's important to note that THNQ has a very low overlap with the MSCI World Index as well as S&P 500 Index and various other competing indices. Our top 10 holdings capture all of the companies that are enablers, developers, and users of AI with high revenue and investment purity around on AI capabilities. Those are some of the key factors that we look for in the member selection process for THNQ, and we think that makes us quite unique. In terms of market cap, THNQ Index members has a diversified exposure.

It's medium market cap is around 38 billion, so it does tilt to larger cap companies than the HTEC or ROBO strategies, because we believe in order to build and develop AI capabilities, you need really strong financial resources and team of AI experts. However, we do have a good representation of the index members with lower market capitalization as well. For example, on the top 10 holding list, about 40% of the companies have a market cap between three and 12 billion. So it is a pretty good diversified group of companies. Now we're going to cover HTEC, H-T-E-C, which is the Healthcare Technology and Innovation Index portfolio.

Last few years have been a very strong year of M&A deals in healthcare. In 2020 alone, five of the 85 index members receive takeover offers bringing the total number of takeover attempts since inception of the index in 2019 to seven. Meanwhile, M&A activity involving our index members as the acquirer have increased to 88 deals involving 52 index members and totaling over 67 billion. We believe that we will see continued M&A activity in various segments of our healthcare sub-sectors where we have exposure in. We believe that longer term, deal activity in the genomic space, especially in genomic diagnostics and gene therapy will continue.

We also expect to see many pharmas and large healthcare providers who will be adding AI capabilities through acquisitions or strategic partnerships. We believe strongly that these innovative healthcare companies in the HTEC Index will continue to be sought out. M&A for non-traditional assets in healthcare such as software or digital health are rapidly accelerating as companies seek out new areas to secure growth. We also think medical instrument industry is quite attractive. It has good margins, stable business base, regulated environment, so higher barriers to entry, and there's a need for continued consolidation.

Companies are constantly looking to augment their capabilities especially in areas of new treatments or procedural solutions that integrate implants or other enabling technologies. As I mentioned that digital health is seeing strong deal activity, virtual care market is a $250 billion market alone. COVID-19 pandemic has placed a spotlight on the traditional care delivery markets. We are seeing healthcare industry embracing technology innovations through acquisitions as we enter this digital era that focuses on the patient's user experience. We think that diagnostic tools with machine vision, AI software, and other digital place will take on a variety of forms and will continue to be an attractive asset.

In terms of notable M&A highlights during the year, Teladoc's acquisition of Livongo for 18.5 billion marks the largest digital health transaction in history. This combination creates one of the largest tele-health companies with remote monitoring capabilities. Meanwhile, Phillips announced its intention to acquire BioTelemetry for 2.8 billion during the year. BioTelemetry currently monitors over a million cardiac patients remotely with its wearable heart monitors, so it would be a nice addition to Phillip's digital health portfolio. In early cancer detection, we saw active M&A activity as well with Illumina and Grail, Exact Science of Thrive for 2.5 billion, and Invitae's acquisition of ArcherDx for 1.4 billion.

As cancer testing gets more sophisticated, it opens doors for precision medicine innovation so we can have personalized cancer therapies. In terms of the portfolio construction, I think what differentiates us from other health care strategies out there is that you can see from the sector-weighting chart that we're very diversified with nine sub-sectors that are shaping the future of healthcare. We have stronger exposure in digital health and life science tools because of our large emphasis on early detection and early prevention. In the past 12 months or so, tele-health, data analytics, and genomics sectors were our top performing sectors.

There has been tremendous value that has been created by these companies that are enabling virtual care visits, sequencing the genomes to diagnose drug therapies and viruses like COVID-19. Much like the ROBO and THNQ strategies, HTEC Index has a diversified exposure and has a lower overlap with the global indices as well as other healthcare-related indices. In terms of market cap, HTEC is truly diversified with large cap taking up just half of the portfolio. There are many under followed in small to mid cap companies represented in the HTEC's strategy that we believe will be the winners of the next decade or so. I'm going to pass it back to Jeremie.

 

Jeremie Capron:

Okay. Thanks very much, Lisa. So we've talked about what's happening on the AI side and on the healthcare technology side, I want to bring the conversation back to robotics and automation. Before I do that, I want to remind everyone, if you have any questions, feel free to use the Q&A box at the bottom of the screen, we'll be happy to take your questions in a few minutes. So, M&A is being a very strong tailwind to the ROBO portfolio since we first designed it seven years ago. In those seven years, we've seen 23 takeover attempts on our portfolio companies. So think about that in the context of index that has just over 80 members. So that's an annual pace of about three takeouts per year on a portfolio of 80 plus companies.

And typically, the premiums that we've seen have been running in the 20 to 50% range. So that's a decent boost to total returns over time. In the past 12 months, we've seen a clear acceleration. We saw seven deals in 2020 and there was one more that was announced just last month. So the run rate is pretty high and I think that's a reflection of what's happening in the tech marketplace as well. So it's basically that growing appetite from larger, slower organizations that really realize or understand that they must have a presence in robotics automation, they must have capabilities because this is where the future is going.

Many of those larger organizations have put that as a higher priority in terms of a strategic objective to play in those markets, but they also struggle to build them, so they decide to acquire it. And that's really what we've seen last year. And I put up on the screen here those seven deals in 2020 to give you a sense of the diversity of them and how they basically touch almost every of the 11 sectors in our classification. So, those companies are ready to pay up. I mentioned the premium is typically between 20 and 50%. So let me go over a few of those deals. At the very top, you can see ISRA VISION. That is a German computer vision company, relatively small, that accepted to sell to Atlas Copco, much larger industrial group from Sweden. That happened early in 2020.

Next up, you can see QIAGEN that's a specialist in automated molecular diagnostics that received a bid from Thermo Fisher. That didn't go through, but certainly helped boost the valuation of QIAGEN in the stock market. The next one here is Varian. That's been a very long-term holding in ROBO. They're the leader in the automation of the radiation therapy for cancer treatment, very large business that is going to Siemens, Siemens Healthineers. That's the healthcare arm of the German group. Then next step you can see Xilinx that's in the process of going to AMD. So Xilinx is a semiconductor company that makes FPGAs. They are the leader in FPGAs, which are chips that are very good with AI applications. So that deal is still in the works.

HollySys, that is a Chinese company that is one of the leaders in industrial automation in the Chinese market. Also a very long-term holding at ROBO. It's received a takeout offer from a group led by the former CEO. And that stock we've seen trading on relatively low valuation for some time. That's another signal that there are assets like HollySys out there that are trading below intrinsic value. Then you can see Omnicell. Omnicell, probably a lot of you haven't heard of this company. It's a California-based business that's pharmacy automation. So think about central pharmacies in hospitals. It's the automation of the medication process, a great business and here again.

The company received an offer, the board evaluated it, and found the offer was too low, so it's been rejected, but you can see Omnicell's stock has been running since. Finally, that's a deal that Lisa mentioned because it touches a company that's in both the ROBO portfolio before you and the HTEC portfolio, and that is BioTelemetry that does the remote monitoring of cardiac activity. So they do wearable devices that track your cardiac activity. So, I think also it's important to reiterate here that a lot of this activity is happening with smaller companies and that's why we think it's important if you run a robotics automation strategy to have that focus on smaller and mid cap companies where a lot of the action is; the growth, the innovation, but also the M&A.

So next I want to touch a little bit on the ROBO portfolio as it stands today. And this really shows diversification in terms of the vertical markets that are addressed by these companies. You can see that this portfolio is not only about companies making robots and autonomous systems, but also the companies that make the technologies that enable that. So think about the sensing. I mentioned the computer vision company ISRA. Think about the computing and the semiconductor level. Think about the actuation, which is how those systems interact with the physical world. So you'll find here highly engineered components that go into robots or automated systems in factories and the likes.

Those are the green segments on the left-hand side of the pie chart. On the right-hand side, you can see the sub-sectors where we have companies that provide turnkey automation solutions for specific industries. So manufacturing of course and factory automation, and then you can see logistics and warehouse automation, which is about... a lot of that is about supporting the e-commerce boom. So you'll find companies that do mobile robots for warehouse automation or the track and trace technology to track packages and parts in a supply chain. You'll find software companies, the software that automates the warehouse and things like that.

Then the healthcare of course that's around 10% of the portfolio. On the right-hand side, you can see the performance for each of those sub-sectors for the past 12 months and in Q4 and you can see that really portfolio doesn't rely on a specific sub-sector to drive the performance. We've seen really, really good performance pretty much across the board. On the next slide, I want to show some of the top holdings, but really think about ROBO not as a concentrated portfolio. You can see the top 10 holdings account for less than 20% of the index. That's because we use that modified equal-weighting as opposed to market cap weighting.

So you'll find that the 80 plus holdings all have a weighting depth that varies between 0.8% and sometimes up to 3%, but every quarter we'll be rebalancing and resetting those weights to maintain that diversification. On the left-hand side, you can see what I called the high active share that means most of these companies are not in traditional equity portfolios because they are not in the broad equity indices. You can see the overlap with the S&P 500 is very low, similar with the All-World Equity Index, and you can also see here that the overlap with other robotics and automation indices in the market is very low.

So one last word on the ROBO Index that's really again reiterating the fact that we have that tilt towards small and mid-caps. So on the next slide here, you can see the breakdown between small, medium, and large and that large caps are less than half of the portfolio.

I want to thank everyone for joining us today. We really appreciate your interest in ROBO Global and our investment strategies and we look forward to speaking again with you soon. Goodbye.