- There may be more M&A in the near future in the technology sector.
- Tech execs confidence level in the global economy has risen from 20% to 80%.
- More than half of tech execs say they will pursue deals in the next year.
- And the tax plan doesn’t have that much to do with it.
While 2017 was a wash for tech M&A, we’re barely a month into the new year and that narrative is already changing.
This is hardly a surprise. In a single year, tech executives’ confidence in the global economy increased to more than 80%, from less than 20%, according to the 17th edition of the EY Global Capital Confidence Barometer – Technology. Pair this with optimism about corporate earnings, tax reform liquidity and confidence in credit availability, and you have an environment that is highly conducive to dealmaking. In fact, 57% of tech executives surveyed said they intend to pursue acquisitions in the next twelve months.
New entrants on the buy side of potential deals are likely to drive greater activity levels in the coming months. Because we continue to live in a sellers’ market, buyers need to be agile and well-prepared to pit themselves against competitive, no-outs and preemptive bids from other parties.
New players at the table
Heightened competition comes, in large part, from increasing interest from nontraditional tech acquirers, sovereign wealth funds and private equity firms converging on the tech market. Private equity firms, in particular, have shown an increased interest in technology assets. In fact, private equity players have more than tripled their tech investments over the past seven years (see chart below, from 451 Research).
While unicorn tech companies are attracting traditional players looking for both the technology and talent upgrades, private equity firms are more likely to bid on companies that have matured past the hype phase to a steady growth — profitable businesses, with a stable management team.
Cash-rich tech incumbents also are looking to build or buy into new technologies through joint ventures or venture arms. Technologies such as artificial intelligence, blockchain and augmented reality — which, despite their growing hype are still very early in their innovation cycle and lack a defined business model — will serve as strategic investments for buyers looking to augment their existing product lines, or hit the next S curve growth cycle.
As with new technology, increased investments in security will likely spur deal activity in a similar way. Hacks and vulnerabilities are growing, and companies within the technology sphere and beyond are looking to build solutions that improve trust and reliability. There are over 1,000 security vendors, and many companies employ two to three vendors per security vertical. We can expect to see further consolidation and deals in this subsector.
How do buyers beat competition while ensuring a fair price?
Heightened competition from private equity firms and strategic buyers will likely incite a jump in hostile and competitive bids. Tech companies should prepare to compete against these market participants by leveraging advanced analytics, evaluating synergy opportunities and carefully crafting deal narratives and integration strategies.
Carve-outs, the sale of business units or segments from larger entities, are also on the rise. These assets may be very attractive, but they carry a lot of risk and uncertainty, in particular around stand-alone costs. The sellers typically look for a speedy transaction, which may leave potential buyers nervous. Companies looking for acquisitions should not shy away from these opportunities. Instead, they should implement the same rigorous evaluation process. The employment of predictive analytics, such as revenue optimization or customer analytics, for example, can provide a clear vision of the acquirer’s own value proposition for the target assets.
In sum, companies looking to buy assets this year need to have their ducks in a row. This means understanding who’s looking at the same assets and how those players measure valuations. Most companies need help in doing that – both from technology tools and a trained business advisor who understands the competitive landscape. Businesses that do not do their proper due diligence ahead of the transaction often lose out on attractive assets. This scenario is completely avoidable with a diligently compiled M&A playbook fit for the buyer’s organization.
Keeping tabs on market and policy changes
Excluding the possibility of geopolitical deterrents, little stands in the way for tech acquisitions this year. While there is some concern that valuations are inflated, even if stock prices were to decline, M&A conditions would remain prime. In fact, decreased valuations would likely drive further activity, because it would spur buyers to chase an attractive purchase price.
As for tax reform, the combination of the different rules is unlikely to significantly change M&A appetite as a whole. Assuming tech giants repatriate foreign cash, many believe Trump’s tax plan will provide slightly better liquidity for tech companies, although it remains unclear if easy access to offshore cash will be used for share buybacks or to fuel domestic deal activity.
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