Under pressure to prepare
Interest rates were on an upward trajectory in 2018 – the Fed raised rates four times in 2018 and there was uncertainty around where rates were headed in the current year until the Fed recently announced it was projecting no interest rate hikes in 2019. However, with future interest rate increases still on the table in 2020 and beyond, tech companies remain under pressure to proactively manage capital and potentially make divestments to pay down historically high levels of debt and streamline product portfolios. Pressure is also coming from activist investors seeking to push some companies to divest assets to reinvigorate company growth and unlock value for shareholders.
The good news is that hunger for tech assets is growing, which means more competition among buyers and, in turn, higher multiples realized for strong assets. Corporate buyers within the sector are snapping up assets to build on their core capabilities and revitalize legacy portfolios, while private equity buyers, which acquired 22% of technology divestments in 2018, are also a significant factor.
As a consequence of competition, tech valuations remain high and continue to influence divestment decisions: the proportion of executives who expect rising multiples to have an increased impact over the next three years is now at 65%, up from 55% a year earlier. Of the 50 largest transactions done by PE firms and strategic acquirers, PE firms paid 5x trailing 12-month sales while strategic acquirers paid 6.3x trailing 12 months sales, up from the 3.8x and 4.9x multiples paid in 2017 by PE firms and strategic acquirers, respectively. (Source: 451 Research.)