3 minute read 6 May 2020
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Tech sector remains confident, continues to eye M&A as strategic tool

By Kenneth Welter

EY Global Strategy and Transactions Technology Leader

Experienced transaction advisor. Tech enthusiast. Husband and father. Sailor. Challenger of the status quo.

3 minute read 6 May 2020

Technology and digital offerings are being prioritized as executives look to navigate the current climate and consider investments for growth.

The global COVID-19 pandemic has been unprecedented, creating new vulnerabilities and unforeseen challenges for all businesses. The latest EY Global Capital Confidence Barometer (pdf) has captured the impact of the evolving situation on technology executives’ confidence.

Despite the recent deterioration of global and sector economic confidence, technology executives are markedly more optimistic about the speed of recovery, with 63% expecting a V-shaped recovery compared with 38% of non-technology respondents.

While supply chain and working capital challenges have been created for companies across the technology sector, these challenges have been offset to some degree by increased customer usage of online collaborative technology for remote workers, education and health care.

Technology and digital offerings are being prioritized by executives as they look to navigate the current climate and consider investments for growth moving forward. Not surprisingly, the sector appears to be more confident in the M&A outlook than other sectors with 70% expecting to see M&A improve in the short term compared with 56% of non-tech respondents.

M&A expectations

70%

of technology respondents expect the M&A outlook to improve.

Well-capitalized companies are expected to use M&A as a lever to accelerate their recoveries. Reduced valuations often create opportunities but can also introduce additional risks, particularly around the business resilience of targets. Industry convergence continues to be a trend, likely accelerated by the current crisis as sectors continue to look to technology to fuel growth, potentially increasing competition and challenging valuations.

Despite the relatively strong posture of the technology sector, significant uncertainty remains. Most companies are focused on stabilizing and assessing supply chains, reining in costs and right-sizing workforces in the face of diminishing margins, increased bad debts and lost revenue.

Accelerated trend to increased capital efficiency

Most respondents stated they are placing a greater focus on capital structures, capital efficiency and funding models. Capital structures will need to be revised and executives are increasing the frequency of their strategic reviews. As companies seek to reallocate capital to enable business continuity there will be the need to assess their portfolios and potentially divest non-core assets and businesses to fund their ongoing operations. Decisions made now need to address the current needs of the business but also enable responsiveness and resilience in the future.

Impact of continued, heightened lack of global cooperation

The ongoing challenges created by geopolitical tensions and the general lack of global cooperation continue to be front of mind for technology executives. Thirty-five percent feel they have not responded well to geopolitical and regulatory changes in recent times, and for most, this will become more complex and challenging. As countries start to ease restrictions after historic stimulus injections, sovereignty will be a core focus, particularly as countries follow their own recovery playbooks. Significant cross-border uncertainty will remain for some time, and the impacts on supply chain, regulatory M&A approvals, trade barriers and skills shortages are unclear at this stage.

Future focus

In the immediate future, business resilience will be a key factor in evaluating targets. The initial shock of the COVID-19 outbreak has paused and delayed many deals. However, as executives shift their mindset from crisis management to strategic execution, M&A is expected to be a key lever that well-capitalized companies will use to accelerate recovery. While most valuations are generally depressed and could create opportunities, there is also an increased business resilience risk. Thirty-nine percent of technology executives flagged “business resilience of targets” as being the biggest factor in future M&A strategies. Going forward, it will be imperative to use appropriate rigor during due diligence.

Summary

The EY Global Capital Confidence Barometer (pdf) gauges corporate confidence in the economic outlook and identifies boardroom trends and practices in the way companies manage their Capital Agendas.

About this article

By Kenneth Welter

EY Global Strategy and Transactions Technology Leader

Experienced transaction advisor. Tech enthusiast. Husband and father. Sailor. Challenger of the status quo.