Mergers & Acquisitions in Quantum
Two recently announced significant M&A deals mark the beginning of increased M&A activity in the Quantum industry.
There were two significant merger announcements last week, with IonQ’s agreement to acquire ID Quantique for $250 million, and Horizon Quantum’s agreement to merge with dMY Squared Technology Group in a $500 million transaction. In addition, IonQ also announced the acquisition of Qubitekk for $22 million earlier this year. The chart below highlights these three mergers as well as six merger and acquisition transactions (M&A) in 2024:
While it’s somewhat rare for significant M&A activity in the very early innings of a new industry, the quantum ecosystem is beginning to mature a bit, and M&A activity will certainly increase as the industry grows. Successful companies will seek to add talent, IP and revenues, and less successful companies seek alternative paths to liquidity. To better understand why, it’s useful to consider some specific reasons companies pursue M&A.
Intellectual Property: A core rational for acquiring another company is to get access to their patents and other intellectual property (IP). For example, in the recently announced acquisition of ID Quantique by IonQ, ID Quantique’s portfolio of nearly 300 patents and patent applications was cited as a motivating driver. Given that IonQ was already a formidable patent holder, this was a quick and convenient way for them to bolster their IP.
Access to Complementary Markets: The ID Quantique deal also offers IonQ (a Quantum Computing company) entry into the quantum networking and quantum sensing markets where ID Quantique is strong. Rather than building a market presence in a new category from the ground up, acquiring another company already in that market is a quick way to gain a strong position.
Talent: There have been numerous reports written about the need to increase the talent pool in the quantum industry, especially on the technical side. If a target company has a strong employee roster and talented engineers, acquiring that company rapidly expands the acquirer’s talent pool.
Revenues: Based on the early-stage nature of most quantum companies, it is difficult to assign traditional valuation multiples to such businesses. This is due, in part, to the reality that the significant majority of quantum companies are losing money and therefore multiples to earning or cash flow are not relevant. Another valuation benchmark is Price-to-Revenues (also known as Enterprise Value/Revenues or EV/Revenues), so many companies can significantly improve their valuations by “acquiring” revenues, or more specifically, acquiring businesses with meaningful revenues that can be consolidated into the buyer’s financials. Acquisitions are also a powerful way to augment historical intrinsic revenue growth
Vertical Integration/Economies of Scale: Another motivating factor is the desire to secure one’s supply chain and/or increase the margin of the company’s offering. If a company buys one of its key suppliers, not only would it then be assured supply of those components, but whatever margin the target company was earning, would then go to the acquirer. In addition, there may be redundant operations between the buyer and target, so by eliminating certain duplicate functions, profitability can be improved.
Valuation Arbitrage: While perhaps a less noble motivation, we can’t ignore the fact that the few public quantum companies trading today (e.g., ArQit, D-Wave, IonQ, Quantum Computing Inc. and Rigetti), are all trading at Enterprise Value/Revenue multiples in the 100’s. Specifically, IonQ today trades at about 108x its trailing revenues, so if they acquire Qubitekk for 3x or 4x revenues and consolidate those revenues into their results, the deal should be accretive to their valuation.
Access to Capital: IonQ and Rigetti each “went public” by merging with a SPAC (special purpose acquisition company), the same strategy Horizon Quantum just announced with its dMY Squared merger. dMY Squared is a “shell company” meaning it is a public entity with cash as its primary asset, so by merging, Horizon becomes public and gets access to that cash. While SPAC mergers are a bit of a fad, and I don’t expect we’ll see many more of them, the concept of merging with a company that has ample cash is a way that cash-starved companies can access expansion capital.
This is a partial listing of some of the benefits that may be available through M&A, and these are often motivating factors in such transactions. While it may be a stretch to conclude that the three significant M&A deals already announced this year mark the start of an M&A trend in the quantum industry, for these and other reasons, we will see an increasing number of M&A announcements in coming quarters. Given this author’s affiliation with Corporate Fuel Advisors, a sponsor of this post, please feel free to reach out for M&A advice if you are a quantum company seeking to acquire another firm, or if you’ve been approached by a prospective buyer or merger partner.
References:
The table and valuation multiples included in this post sourced from PitchBook Data, Inc.
