Could Nvidia’s [NASDAQ:NVDA] latest results accelerate the trend of venture capital (VC)-backed European artificial intelligence (AI) players seeking strategic acquirors?

There’s a plausible scenario where the answer is yes. Despite recording a staggering 122% YoY hike in 2Q24 revenues, the Silicon Valley-based AI chipmaking behemoth fell short of the most breathless analysts’ expectations and flagged some production problems. Its shares fell in the aftermarket as a result and are indicated lower ahead of today’s (29 August) bell.

Nvidia’s results are treated as a bellwether for the broader AI industry – indeed, for the entire S&P 500, of which it accounts for an astonishing 6%. A potential read-through for dealmakers this side of the pond is that while the AI revolution is real and capex at the likes of Nvidia’s major league customers such as Microsoft [NASDAQ:MSFT] and Alphabet Inc. [NASDAQ:GOOG] remains robust, visions of endless, near vertical growth and valuations pricing in perfection may prove to have been hallucinations.

And no-one wants to be caught still delivering their elevator pitch once it’s reached the basement.

Europe has seen a massive influx of venture capital (VC) cash into AI start-ups. Mergermarket’s Likely VC Exit predictive algorithm and GenAI tool together identify more than 800 VC-backed companies with AI offerings in Europe.*

If the path up the mountain looks a little rockier today than it did when GenAI hype picked up its head of steam in late 2022, some entrepreneurs and investors might want to consider a Plan B instead of continuing to build themselves.

Vertical integration (strategic companies buying AI players to enhance existing business models) and consolidation (successful AI firms buying expertise and market share) have already been coming into sharp focus.

Deals with European AI companies on the sellside and global strategic players on the buyside already boomed in 2023, with 71 transactions worth EUR 1.22bn, according to Mergermarket data. The previous high watermark in terms of deal volumes was EUR 602m over 31 deals in 2018.

The data shows that the year-to-date (YTD) is already off to a flying start, with EUR 876m over 65 deals. This still lags YTD23, when EUR 1.2bn had already crossed the line. However, it is more than 50% ahead of the previous record of YTD18; as well as beating every full-year (FY) result barring FY23.

These YTD numbers have been boosted by AMD’s [NASDAQ: AMD] July agreement to acquire Silo AI, a Finnish provider of AI software, for USD 665m (EUR 596m). Silo AI is the largest private AI lab in Europe, while the US bidder wants to deliver end-to-end AI solutions based on open standards.

Blowing bubbles?

Research from Arcano suggests that the gap between the market capitalisation of listed AI companies and their revenues shows that we could be in the middle of a bubble.  “Speculative frenzies are inherent in technology and are not something we should be afraid of, but we should be cautious,” it said.

Any veteran dealmakers reading this will be quick to draw connections with the dot-com bubble around the turn of the century and the subsequent bust.

It is worth remembering that the first commercially successful smartphone, Apple’s [NASDAQ: AAPL] first-generation iPhone, was released relatively late, in 2007 – more than a decade after the US Communications Act of 1996 fired the starting gun on the bubble and a full seven years after the subsequent crash.

Consolidators

Mergermarket’s proprietary intelligence has identified plenty of potential consolidators on the buyside that could offer a Plan B. For example, Board Intelligence, an AI-powered board-management software platform, is exploring its first acquisitions to accelerate its geographic and product expansion. The UK-based company could consider ticket sizes up to hundreds of millions of pounds.

Meanwhile, Dutch semiconductor metrology equipment firm Nearfield Instruments is pursuing inorganic growth. It has identified targets in areas including AI and machine learning. Its capacity for deals was boosted in July when it raised EUR 135m in a Series C funding round.

Although not a major source of deal activity yet, mobile operators could also be tempted to buy AI players too. The rationale is that these targets can help support the transition of business models towards bundled services – a potentially exciting area for dealmakers interested in finding buyers for start-ups.

*Mergermarket’s Likely VC Exit predictive analytics assign a score to VC-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.