M&A appetite endures despite geopolitical headwinds in technology sector

Technology executives continue to see M&A as a strategic tool to drive growth, acquire talent and capabilities.

T
he latest EY Global Capital Confidence Barometer shows that technology executives continue to have high confidence in the global and sector economy, with four of five expecting the global economy and sector economy to grow in the next 12 months. Tech executives also have a positive view of the capital markets — more than three-quarters of respondents see corporate earnings, short-term market stability and credit availability improving.

Yet, although technology executives remain optimistic about the economy, capital markets and M&A, a number of external factors are affecting their optimism, which is down from the peak seen in the last edition of the CCB in April 2019. Ongoing trade and tariff issues, the persistent specter of Brexit, geopolitical uncertainty and underwhelming performance of high-profile tech IPOs has tech executives tempering their enthusiasm somewhat.

Further, while we have seen a slowdown in tech M&A activity in the second half of 2019, technology executives continue to have a healthy appetite for dealmaking. This is a stark contrast to the waning interest we saw a year ago. Fifty-nine percent of tech executives expect to pursue M&A in the next 12 months, two percentage points below the record-high dealmaking intentions (61%) reached in the previous CCB, but seven percentage points higher than the average for all sectors.

The higher dealmaking appetite underscores the importance of M&A as a critical strategic tool for technology companies to drive growth, gain or retain competitive advantage by quickly acquiring talent and capabilities, and deal with ongoing trade and tariff uncertainties.

Private equity (PE) continues to have a healthy appetite for tech assets, driving competition and valuation

Expressing a strong appetite for dealmaking, 79% of tech executives expect an increase in competition for assets in the next 12 months, mainly from PEs but also from strategic buyers. Eighty percent of respondents expect PE firms to be a significant acquirer of assets in the tech sector. Tech executives expect this increase in competition to test valuations, although the transaction multiples have softened in 2019.

A tailored approach for each deal that aligns a deal’s strategic rationale and execution or post-deal integration can maximize value for the acquirer

Recent M&A trends show that growth deals (deals intended to drive revenues through acquisition of new capabilities) are outpacing consolidation deals (deals intended to strengthen market share and achieve cost synergies), suggesting more executives believe that acquiring technologies is significantly faster and less risky than in-house development, and in many instances is the only viable option in the dynamic technology sector.

The latest edition of the CCB highlights diverse reasons for pursuing M&A, e.g., acquisition of technology, capabilities, talent, sector convergence, entering new markets, expansion into adjacent space and dealing with trade and tariff uncertainties. CCB also highlights diverse preferences for doing bolt-on acquisitions, acquisition of transitional capabilities or transformative deals.

In light of various strategic drivers for pursuing M&A and preferences for the deal types, it’s imperative that acquirers take a nuanced approach for each deal that aligns the deal’s strategic rationale to the deal’s execution and post-deal integration to derive maximum value from their deals. This is critical in an environment where the competition for assets is expected to go up, and acquirers may end up paying more for quality assets.

• For example, buyers hunting for transformational deals need to understand that short-term cost synergies may be more challenging to realize when compared with a consolidation play or tuck-in acquisition. Instead, transformational deals require more attention and focus on validating long-term top-line synergy estimates (e.g., cross-selling existing products, new customer relationships, new products).
• As another example, dealmakers pursuing M&A to acquire talent or an innovative startup should have a clear plan for maintaining the innovative culture and retaining talent.

Irrespective of the deal type, it’s vital for buyers to have a mechanism in place before the transaction close to track post-close progress on various strategic parameters and make certain that the deal objectives are met. A detailed commercial diligence pre-sign can validate the market attractiveness and inform appropriate strategies.