M&A in the technology and telecommunications industries
The high valuations for tech companies have dropped… so now what’s the best strategy for tech M&A?
And who’s still buying?
In 2021, buyers started a feeding frenzy that chased valuations to the sky. “We saw a significant amount of activity, but now M&A in the tech industry is following the global M&A trends — which have slowed,” said Grant Thornton Strategy and Transactions Advisory Services Partner Bill Pollatos. “All signs indicate that will continue in Q1.”
“The biggest slowdown is where companies were chasing growth for growth’s sake,” said Grant Thornton Strategy and Transactions Advisory Services Partner Bryan Walker.
As a result, valuations have come back down to earth, and buyers are scrutinizing their options. “Before, I think there was more focus on the growth trajectory and the profile of the asset,” Pollatos said. “Now, there’s more focus on understanding cash flows and profitability, in addition to the growth profile and the health of the customer base.”
With the right focus, strategic opportunities can become clear to savvy buyers.
Who’s still buying?
“We can't talk about M&A in this economy without talking about private equity, and that applies to tech,” Walker said. “Private equity continues to have dry powder. People are still raising funds in this environment.” Plus, many private equity (PE) firms have been building support for strategic moves.
“Over the last half a dozen years, some of the best PE firms have built internal operation optimization teams,” noted Grant Thornton Technology and Telecommunications Industries National Leader Steven Perkins. “That can pay off now — as they go through their existing portfolio, make sure they're getting as much as they can, then integrate what they buy to make sure they get maximum value from that.”
“The need to keep pace with emerging architectures is a continual driver. AI, cloud, IoT and others drive continual M&A activity in this industry.”
Like PE firms, many big technology companies have cash ready to go shopping at lower valuations. “They're going to be judicious, but I think they'll continue to acquire new product areas for their portfolios, or new architecture, and they'll get much more value for their money,” Perkins said. “The need to keep pace with emerging architectures is a continual driver. AI, cloud, IoT and other architectures drive continual M&A activity in this industry.” Even though most growth-driven M&A has slowed, Perkins said, “I think you will still see product diversification — companies looking to get into new products and services areas.”
The tech industry might also spot some new buyers on the scene. “You might see some non-technology actors who couldn't afford to buy at the higher valuations,” Perkins said. “Those could be financial services institutions for FinTech, but also healthcare, automotive and industrial manufacturing. They're all buying technology capabilities to bring in-house now.”
Even at the right price, buyers need to find the right fit. There are timely factors for buyers to consider in the current market.
24:45 | Transcript
"The tech industry tends to be ahead when it comes to systems integration. They have tech talent in-house and are used to operating from an agile perspective."
Targeting the right companies
What should buyers consider?
Now is the time for companies to make sure they’re poised for the next market upturn. Many PE firms are looking to balance their overall portfolio health, find complementary add-ons, and ensure their companies can show organic growth. As buyers survey the current M&A opportunities in tech, they have important factors to consider.
Supply chains are often a risk factor for software, and they cause lingering risks for hardware and services. “I think hardware issues in the supply chain are continuing to impact revenue,” Pollatos said, and that impact can spread. “When solutions include a component of hardware, we are still seeing increased backlogs that are impacting revenues. People are still unable to get hardware in a timely manner.”
“The deals that are solving a problem, improving operations, or improving profitability are the first ones getting done in the current environment.”
Walker added that “I have a client who is pursuing an M&A transaction specifically to solve a problem in their supply chain. They want to own another step in the supply chain, versus being reliant on a third party. The deals that are solving a problem, improving operations, or improving profitability are the first ones getting done in the current environment.”
For software companies, it’s especially important to consider the customers. “On the software side, we're looking at the health of the customer base, growth in that customer base and the level of churn,” Pollatos said. “Also, look at potential expansion opportunities for the customer base. What are the cross-sell opportunities and potential whitespace? What opportunities are there to introduce new products, solutions or modules that can better integrate the solution as a whole through organic or inorganic growth?” As you examine the customer base and new opportunities, watch for potential data privacy issues.
Renewals and contracts
Contracts and renewals can be a central factor for predicting revenue, but make sure to understand where they could change. “Really get in front of any issues on renewals of key customer contracts, understanding when those renewals will come about and any negotiations that need to happen,” Pollatos said.
“A lot of the times, you can look at a customer's usage and understand what is happening from a satisfaction or adoption perspective — to understand potential upside or downside on renewal. If you see a decline in usage, you can infer that the company may not need or may not continue the number of users they've licensed. The number of user-based licenses companies need will also be impacted by the layoffs in the tech sector.”
“One thing that's particularly interesting right now is the question of price increases across the portfolio. It’s important to determine whether recent price increases really translate to increased earnings, or merely accommodate increased costs for a company,” Pollatos said. The inflationary environment makes it important to understand which companies can now increase prices. “We've seen companies that had not raised prices for many years, but successfully did so last year,” Walker said.
Ultimately, it’s important to consider the collectability of receivables. “I’ve seen a lot of companies recently where the accounts receivable base has realized some aging,” Pollatos said. “Understand the health of the receivable base — if you're not collecting the cash, it doesn't translate to revenue or annual recurring revenue.”
Apart from considering the necessary factors before a potential deal, buyers need to make sure they’re prepared for post-deal success.
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Making your deal work
How can buyers prepare for success?
In any environment, M&A success requires preparation before the deal. “A successful acquisition starts with a strategic plan, and a hundred-day plan for the high-priority items post-close,” Walker said. “Then, you need continuous monitoring to make sure that the items on the hundred-day plan are getting executed. You also need to make sure that the strategic rationale, and the execution steps that will bring that to fruition, are all in place.”
Pollatos agreed that it’s critical to support the post-deal plan’s execution. “The deals that are successful are the ones that have a team in place, stick to a timeline, understand what their achievements are, know how they can realize the synergies, and ensure that the team is on board with that.”
To support integrations and other initial work, companies might need temporary scalability. “Having the ability to scale, perhaps with offshore resources, can help with the level of effort required to combine systems upon acquisition. Offshore resources with scalability can provide more horsepower and the ability to execute development tasks in a timely fashion,” Pollatos said. This could also be a time to streamline systems and processes.
While M&A activity in the tech industry has slowed, the current environment could provide some perfect opportunities. “It might not be the environment to do your first acquisition, but if you have a proven track record and a team to help you post-acquisition, then you're going to be in much better shape,” Perkins said.
With the right support, strategy and opportunity, a tech buyer can make critical moves right now. “I think deals that are truly strategic, and are part of a larger strategic plan, are the ones that are going to be successful,” Walker said.
National Managing Principal, Industry
As National Managing Principal, Industry, Lisa leads the strategic direction and oversees all aspects of the firm's industry program.
- Technology and telecommunications
Sonny D. Origitano
Managing Director – Strategic Solutions
Sonny has extensive experience in pre-close and post-close integration and separation strategy and execution including; one-time cost identification, stand-alone financial and operating models, synergy identification, stranded-costs reduction, transition service agreements (TSA’s), day 1 readiness and contract analysis to maximize or preserve value throughout the transaction life cycle.
- Transportation, logistics, warehousing and distribution
- Retail and consumer products
- Private equity
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