Deal making confidence improving in Australian technology sector
Friday 29 November 2013 — Sixty-eight percent of technology executives believe the global economy is improving, with another 20% indicating the economy is stable. This points to the greatest confidence in the global economy in two years, according to EY’s ninth bi-annual Technology Capital Confidence Barometer.
Just six months ago, only a little more than half of respondents believed the economy was improving.
EY Private Equity Area Leader Bryan Zekulich said the findings are reflected in the Australian market where there has been a marked increase in activity in the past six months.
“Until recently there was a notable lack of early stage investment in technology in Australia. Now we are seeing an increase in the volume of technology investment, particularly from overseas,” Mr Zekulich said.
“Funding for this is coming from a mix of non-traditional sources, including high net worth investment pools, corporate balance sheets and US private equity firms. However, local venture capital investment is still struggling to reach its historical levels.
“Primarily this investment is in local software and application development opportunities or technology enabled verticals where the model is scalable enough for them to have global application.
“In the local environment, we believe that companies looking to make deals should be moving within the next six months while conditions remain positive.”
According to the survey, growth is clearly a global imperative for technology companies as 68% of executives say they plan to accelerate growth strategies over the next 12 months. After several years of uncertainty, the report notes that companies have strengthened their balance sheets and largely optimised their capital structures. Companies are increasingly ready to capitalise on the improving global economy and credit markets to implement their growth agendas.
With core fundamentals in place to support technology M&A, 33% of technology executives surveyed expect to pursue an acquisition, compared with 20% a year ago. This 65% improvement in the number of companies expecting to pursue acquisitions resonates from the notable increase in the last 12 months in an improvement in the number and quality of opportunities and the likelihood that deals will close.
“There is a pent up wave of IT spending building in Australia. On one side there are cashed-up large vendors and resellers. On the other side, corporate balance sheets are generally in good shape,” Mr Zekulich said.
“As confidence continues to build we expect to see a range of M&A activity in the IT sector as players consolidate or acquire other businesses to build the resources or the capabilities necessary to keep pace with increased demand for services. This may also lead to new players entering the market to capitalise on that increased demand.”
The report identifies the following key trends.
- Confidence in global economy is at a two-year high. Sixty-eight percent of technology executives believe the global economy is improving compared with 54% six months ago. Executives who see the economy declining fell from 13% in April to 12% in October — the lowest in more than two years.
- Job creation underscores growth. Technology respondents’ commitment to job creation is at the highest level in two years and highlights that companies need to hire as they prepare for the coming wave of growth. At 57%, job creation expectations for technology companies are up from 41% six and 12 months ago.
- Credit is widely available, but cash is on the rise to finance technology deals. The vast majority of technology executives now consider credit availability either stable or improving, as the sentiment on improving credit is almost double what it was 12 months ago. However, the percentage of technology companies planning to use cash to finance deals is increasing compared with 12 months ago, reflecting confidence in overall economic growth.
- Valuation gaps expected to widen. As transaction volumes accelerate, there is a natural divergence between buyers’ and sellers’ expectation on pricing. Recent strong stock market performance has helped increase this gap. Forty-five percent of technology executives expect valuation gaps to widen over the next 12 months versus 18% six months ago, or 2.5 times higher. This widening gap results from buyers and sellers adjusting their expectations at different rates.
About the report
The EY Technology Capital Confidence Barometer is a survey of 1,600 senior executives in 72 countries, including 181 executives from the technology sector. The objective of the Barometer is to gauge corporate confidence in the economic outlook, to understand boardroom priorities in the next 12 months, and to identify the emerging capital practices that will distinguish those companies that will build competitive advantage as the global economy continues to evolve.
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