The global M&A market is in overdrive – The fourth quarter of 2020 alone delivered deals totalling more than US$1 trillion. But the momentum didn’t stop there, snowballing into US$1.3 trillion in the Q1-2021 (Reuters). And where were these deals happening? Morgan Stanley’s figures show that more than one-fifth of deals announced since the pandemic struck – 22% – were in the technology industry, double the sector’s historical share.
The message? That tech M&A is powering ahead post-pandemic, with no sign of slowing down. Other commentators tell the same story. Industry analysts Verdict estimate that tech M&A deals in Q4 2020 totalled US$243.37bn globally, 107% above the last four-quarter average, led by the US and followed by the UK and China.
As experts who are involved in tech M&A deals on a daily basis, we know first-hand that the market has been crazily busy since August 2020, with demand from buyers pushing deal volumes dramatically upwards and propelling multiples to sky-high levels. What’s more, there’s no indication of the market cooling off any time soon. And drawing on deals currently underway both in the UK and internationally, it’s possible to pinpoint some key priorities for dealmakers going forward – especially for sellers seeking to capitalise on the resurgent interest.
But before looking forward, let’s see how we got to where we are. Tech M&A was buoyant before COVID-19 hit – and it’s hardly surprising that the initial shock brought completions to a shuddering halt. But, crucially, most deals weren’t dropped entirely. Instead, they simply went on the back burner until a degree of certainty returned.
People didn’t have long to wait. Within a couple of months – by around the middle of 2020 – it was clear that the tech industry was in a very different position from hard-hit sectors like travel and hospitality. Fuelled by significant private equity (PE) dry powder, low interest rates and corporates’ pursuit of their strategic ambitions, investors deduced that the tech sector would remain resilient in any subsequent waves, and doubled-down on their investments.
The temperature rose faster in some areas of tech than others. Cloud and software-as-a-service (SaaS) providers were a hot-spot, as customers accelerated their cloud migrations in light of developments like the shift to home-working. Conversely, consulting and IT service companies did less well, as customers pushed back non business-critical projects. Late 2020 saw transactions ramping up across all areas of software – not just those playing into the dynamics of the pandemic, such as home working.
Today, as we reach the mid-point of 2021, M&A interest in the technology sector has focussed further: digital platforms such as online marketplaces and comparison tools are increasingly in acquirers’ sights, powered by changing consumer behaviour and strategic buyers looking to gear up their capabilities in areas like artificial intelligence (AI), cloud transition (applications, connectivity and security) and Internet of Things (IoT).
The first is new customer wins. Always challenging, selling to new prospects became even harder in the pandemic, as social distancing made relationships trickier to build. But businesses adapted swiftly – and 2021 is seeing a surge in wins, as customers decide they can’t hold back any longer from investments in new and innovative tech.
Second, upselling existing customers with new functionality, additional modules and the cross-selling of products. While COVID-19 has acted as a catalyst for some customers to invest in technologies for remote working, many tech companies have seen their upselling revenues hit by customers deciding to live with what they’ve got for a while longer. But now the logjam of pent-up demand is breaking, and these customers are starting to dip into their pockets for much-needed upgrades.
The third driver is price rises. Some price increases are built into contracts. But where they’re not, the uncertainty around the pandemic made them more difficult to push through. Today, with many services and software having proven themselves business-critical during the crisis, raising prices is easier once again.
For the tech sector, the net effect of these shifts has been a sharp ‘v-shaped’ recovery in revenues. And with many tech companies having cut back on costs during the crisis, margins are also higher – contributing further to the surge in M&A.
Deal activity in the UK is also being bolstered by some specific local factors. Expectations that the Chancellor’s March 2021 Budget would reduce entrepreneurs’ tax breaks triggered a short-term rush of owner-managed businesses looking to sell out (although in the end there were no significant changes). Uncertainty has been reduced by the end of the Brexit transition period and start of the new UK-EU trading arrangements. And whilst ongoing limitations on international travel will see some reshoring of development work to the UK, the continued roll-out of vaccination programmes should provide some medium term optimism.
All of these points contribute to a strong UK tech M&A through 2021 and beyond. But how can prospective sellers maximise the opportunity?
I’d highlight two priorities when pitching to buyers, both centred on evidencing the strong sustainable revenue growth that drives valuations. First, articulate smart go-to-market systems and processes for customer acquisition, using analytics to understand and shape the customer journey and experience to maximise all three growth drivers – new wins, upsell and price rises. Second, demonstrate that the business’s rising revenues aren’t just a post-COVID bounce from delayed sales, but genuine growth sustainable into the future.
Prove those two things, and you’ve proven your business really is resilient. And attractive to buyers.