Acquire or Be Acquired:The Rising Importance of AI in M&A Strategies

Recent findings from a 451 Research survey highlight the growing importance of generative AI in the software industry, particularly for SaaS vendors. The survey reveals that almost one-third of respondents consider AI capabilities "extremely important" when choosing CRM software, with similar trends observed in collaboration tools and office productivity suites. This underscores the necessity for SaaS vendors to reevaluate their product strategies to integrate AI features, which are rapidly transitioning from novelty to necessity.

Key Facts and Conclusions from the Recent Survey

Gen AI adoption is still in its early stages but growing fast
With only 20% of organizations currently using generative AI tools, another 20% in discovery or proof-of-concept, and 26% considering implementation in the next two years, generative AI adoption is clearly on the rise. Many companies are in the early stages of exploring generative AI, indicating that the market for these technologies is expanding rapidly. The 26% planning future adoption suggests a strong pipeline for growth, creating opportunities for AI vendors and IT services companies to guide these organizations through their AI journeys.
Strategic importance of Gen AI varies, but awareness is growing
Only around 15% of organizations ranked generative AI as a high strategic priority, while almost 47% consider it a medium priority. This suggests that while generative AI is gaining traction, it hasn't yet become a top strategic priority for most companies. The relatively modest strategic importance implies that many organizations still view generative AI as experimental or supplementary, rather than core to their business strategies – at least for now.
IT and customer-facing departments are key areas for AI application
Generative AI tools are being applied primarily in IT operations (coding, anomaly detection, etc.), customer service (chatbots), and marketing (content generation). These areas represent direct opportunities for efficiency improvements and automation. Organizations are starting to leverage AI for tasks that are traditionally time-intensive and repetitive. This indicates a shift toward operational automation and AI-driven customer interaction models. The emphasis on customer service is indicative of companies betting on AI to improve service quality and reduce operational burdens.
Productivity and cost reduction are still the top benefits
The top benefits realized or expected from generative AI adoption are increased workforce productivity (approximately 54%) and lower operational costs (around 36%). Other benefits reported include customer experience improvements and scalability. Generative AI is still viewed primarily as a tool for efficiency, enabling organizations to do more with less. This is likely to lead to reshaped workforce structures, where certain tasks are automated, and employees either focus on higher-value activities or are made redundant. For companies facing budget constraints or needing to scale, generative AI is becoming a vital tool.
Challenges remain around security, compliance, and cost
The biggest challenges reported to generative AI adoption include security and compliance concerns (around 33%), quality concerns (approximately 29%), and cost (about 27%). Other reported barriers include skills shortages and regulatory challenges. For widespread adoption to occur, organizations need solutions to overcome these hurdles. Security and compliance concerns may slow down adoption in highly regulated industries like finance or healthcare, where the risks of breaches or misuse are higher. The cost issue suggests that AI tools are not yet affordable or accessible for smaller firms, which could widen the gap between early adopters and late adopters.
Generative AI features are becoming important in SaaS selection
The availability of generative AI capabilities is a growing factor in SaaS technology selection, particularly for CRM, collaboration tools, and office productivity software. For example, almost 33% of respondents ranked generative AI as extremely important for CRM selection. SaaS providers will increasingly need to integrate AI capabilities into their platforms to remain competitive. As AI-powered features become more critical in everyday business functions, companies will look for software solutions that embed AI-driven efficiencies—particularly for customer relationship management and productivity tools.
The opportunity for vendors and IT services companies is immense
The report shows a growing interest in GenAI but reveals several barriers (security, cost, skills shortage) and uncertainty (with many companies still in the exploratory phase). This creates a significant opportunity for tech vendors, consultants, and IT service providers to help businesses overcome these hurdles through tailored solutions, training, and managed AI services. Companies that offer comprehensive AI implementation and support will find a ripe market of organizations eager to adopt, but in need of guidance.

M&A Implications of Generative AI Adoption

The acceleration of generative AI adoption, and its growing integration into business processes, will drive significant M&A activity. Here are several high-profile acquisitions that highlight the growing importance of AI in M&A:

Databricks acquired MosaicML, a provider of machine learning and generative AI model development SaaS, for $1.3B in July of 2023.
IBM Acquired Apptio, a provider of AI-based IT business management and ERP SaaS, for $4.6B in August of 2023.
Insight Partners & Clearlake Capital acquired Alteryx, a provider of generative AI-based analytics software, for $4.46B in March of 2024.
Vista Equity Partners acquired Model N, a provider of cloud and AI-based revenue optimization and compliance management software, for $1.25B in April pf 2024.
Hewlett Packard Enterprise Company is acquiring Juniper Networks, a provider of AI-based cloud-native networking management software and systems, for approximately $14B in a transaction expected to close in early 2025.

These and similar acquisitions demonstrate the strategic importance of AI capabilities in driving M&A activity across various sectors of the software industry.

Here are the M&A trends we see emerging as businesses prioritize AI for productivity, cost reduction, and automation.

AI-enabled companies will become strategically more important
AI-enabled software companies will become more attractive acquisition targets for larger players looking to incorporate cutting-edge AI capabilities into their offerings. Established software firms that lack in-house AI development expertise will likely seek acquisitions as a faster, more efficient way to integrate AI tools like text, image, and code generation. As AI becomes more central to business operations, acquiring AI-enabled capabilities will help larger firms stay competitive. AI startups or smaller software companies offering niche, scalable AI solutions will likely experience heightened demand from strategic acquirers looking to quickly integrate generative AI into their product suites.
AI-integrated solutions will fetch valuation premiums
AI-enabled software companies are likely to command a premium valuation during M&A deals, particularly if their products are well-integrated with generative AI and demonstrate clear ROI for customers (e.g., increased productivity, reduced costs). The ability to offer AI-driven features as part of core business operations (CRM, ERP, collaboration) will enhance a company's value proposition. Buyers are willing to pay more for software companies with AI capabilities that differentiate them from competitors, and companies are allocating more of their IT budgets toward AI-related capabilities. These features provide immediate value to buyers’ existing platforms, particularly in sectors where AI adoption is already in high demand (e.g., enterprise productivity, automation, and customer experience).
Consolidation opportunities will emerge in AI and niche software segments
Smaller businesses will likely lack the resources to develop their own AI tools or meet security and privacy standards. Consolidation is likely in the generative AI space as larger companies look to acquire smaller software providers that offer niche AI solutions tailored to specific industries or business functions. SMBs with strong AI tools in IT operations, customer service automation, and marketing tech will become prime targets. By consolidating, large companies can acquire pre-built AI technology and customer bases, improving their market share and accelerating time-to-market for AI solutions. For smaller software companies, selling to a larger firm may be a strategic way to overcome barriers like resource limitations allowing them to scale their technology faster.
Non-AI-enabled software companies will face additional challenges
The rising importance of generative AI means that AI capabilities are becoming a critical factor in software selection. This means that software companies without AI-enabled solutions face higher risks of being left behind or undervalued in the market. Buyers may favor AI-enabled software firms, reducing acquisition demand for non-AI companies. Non-AI software companies may need to acquire AI capabilities themselves or risk becoming obsolete in a more AI-centric market. Buyers in the M&A space are increasingly looking for companies that offer modern, AI-powered solutions. Non-AI software companies will need to adapt by developing AI capabilities organically, forming partnerships, or making their own acquisitions in the AI space to remain relevant and valuable to potential buyers.
AI-enabled software companies will attract cross-industry acquirers
Generative AI is applicable across many industries, and so AI-enabled software companies will attract cross-industry acquirers beyond traditional tech companies. Firms in industries such as finance, healthcare, manufacturing, and retail may look to acquire AI-enabled software companies to enhance their own internal operations and product offerings. Cross-industry acquisitions will likely become more common as businesses in non-tech sectors realize the importance of AI tools to optimize functions such as customer service, security, and process automation. This increases the pool of potential buyers, driving up competition and valuations. We are already seeing this.
Defensive acquisitions will become more commonplace
Companies that lack in-house AI capabilities are likely to see acquisitions as a way to defensively keep pace with competitors. Defensive acquisitions of AI-enabled companies will become more common, as firms across industries acquire AI companies to prevent competitors from gaining a technological advantage. Software companies with limited AI development capabilities may feel pressured to acquire AI startups before their competitors do. Defensive acquisitions can be a strategic move to secure AI expertise, intellectual property, and market position. Smaller AI companies, especially those developing cutting-edge or niche generative AI tools, are likely to be highly sought-after by larger firms looking to protect their market positions.
Skills shortage will drive demand for AI capabilities in acquisitions
As the 451 Research report indicated, one of the top obstacles to AI adoption is a skills shortage, which is limiting many companies from developing their own AI tools in-house. Acquiring AI-enabled software companies also provides access to critical talent and expertise. Companies with strong AI development teams or research capabilities will be particularly valuable in the M&A market, as buyers seek not just the product, but the human capital needed to continue AI innovation. The talent shortage in AI will lead buyers to view acquisitions to secure the necessary expertise for their AI ambitions. AI startups and smaller firms that have skilled technical teams will continue to be attractive targets in M&A deals, potentially commanding higher valuations based on their talent pools.

The integration of generative AI into business operations is reshaping M&A for software companies. Those with robust AI capabilities are likely to experience heightened demand and premium valuations as businesses across sectors seek to capitalize on the benefits of AI technologies. On the other hand, non-AI legacy software companies may struggle to remain competitive unless they adapt by acquiring AI capabilities themselves.

Defensive acquisitions, skills shortages, and the strategic importance of AI will continue to shape M&A in the short-term, particularly for small to medium-sized software companies and AI-driven firms.