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In brief
A new EY-Parthenon study reveals that in times of economic chaos, technology companies that stay on the offensive and maintain a sharp focus on revenue growth will likely be rewarded by the market.
How EY-Parthenon can help
EY-Parthenon TMT strategy consulting teams can help identify growth and digital infrastructure opportunities. Learn more.
Read moreEY-Parthenon team tracked the results of more than 700 global publicly listed technology companies with a market cap above $1 billion from January 2017 through July 2022. The research indicates that companies that pursued mergers and acquisitions (M&A) during that period generated higher total shareholder returns (TSR). Despite market volatility due to the pandemic, high interest rates, inflation and geopolitical uncertainty, TSR for these high-growth tech companies was 2.1x low-growth tech companies during the past five years.
An EY-Parthenon study of TSR during the 2008 Great Recession showed similar results.¹ Companies that raised capital and invested in M&A following the 2007–2009 period had a significant advantage over their competition.
From the Great Recession to the COVID-19 pandemic, the markets have historically rewarded companies that focused on revenue growth, particularly via acquisitions. The new study indicates that the trend continues, and many CEOs in the technology, media and telecom (TMT) sector appear to have taken note.
In the newly released EY CEO Outlook survey, 54% of TMT executives say they plan an acquisition within the next year. However, executives also say that given current economic conditions, they are taking a more cautious approach when determining which targets to acquire.² Their top deal drivers include investing in early-stage companies to enhance portfolios and strengthen talent pools and access to new markets in countries they currently do not serve.
In the new TSR study, the story and the results are different for tech companies that did not focus on revenue growth. They suffered over the long term with market returns 20% lower than those who did not.
Further analysis indicates that inorganic growth was better rewarded than organic. Serial acquirers generated 1.6x shareholder return than those that pursued organic growth.
The latest EY study of TSR for technology companies looked at three types of acquisitions, including transformative, strategic tuck-ins and scale. Of the companies studied, all three types of acquisitions were rewarded with high TSR. Potential reasons for higher rewards include reduced time to market for products and customer acquisition, and market expansion that often accompany acquisitions.
Companies that pursued transformative or scale-based deals earned total shareholder return of 166% and, similarly, companies that went for strategic or tuck-in deals earned total shareholder return of 179% from January 2017 through July 2022. In comparison, less acquisitive technology companies generated 118% total shareholder returns, about 50% less than more active acquirors. Acquisitions of all types can help a company to jump into a new market or ramp up a new technology quickly. M&A can also solve time-to-market and talent issues far more quickly as compared to organic growth. For example:
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Discover M&A advisory services from EY when you buy and integrate. We help enable strategic growth through integrated mergers and acquisitions, joint ventures and alliances.
Read moreSeveral factors indicate that the market tends to reward revenue growth via acquisitions in the long term, helping companies to lessen the impact from economic turbulence brought on by the 2008 Great Recession or the pandemic. Lower valuations due to market turbulence combined with record levels of cash on hand may present an unprecedented buying opportunity for technology companies seeking to revise operations and business models to compete effectively in the future.
Unprecedented levels of cash reserves combined with lower valuations may entice buyers to make transactions that they previously found too expensive. According to a report by Kellogg Insight³ in April 2022, US companies were sitting on $5.8 trillion in cash reserves due to nearly a decade of record profits and an economic boom that spanned several decades. The more than 700 technology companies studied in the most recent EY-Parthenon TSR study had cash reserves of $1 trillion.
At the same time, a recent EY analysis of Capital IQ data⁴ found tech companies also experienced a 30% decline in valuations since December 2021. Lower valuations may also benefit private equity buyers who want to acquire companies at lower valuations with hopes of later selling the company for a profit.
Regardless of economic environment, getting the integration of two entities right is the single most important factor to M&A success.
Focusing on the following three areas will help technology companies successfully integrate targets and accelerate revenue growth. These include:
As illustrated below, companies can also adopt faster scaling practices through product alignment and go-to-market strategy acceleration.
Tech executives can navigate the current economic volatility by adjusting their strategy and preparing for the future with strategic acquisitions. EY research indicates the market typically rewards companies who focus on revenue growth during periods of recession and economic turbulence, with all three major types of acquisitions often resulting in an uptick in TSR. However, proper planning for tech M&A, integration and scaling are critical for success.
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