The trillion-dollar technology industry is inherently subject to massive growth, disruptive mega-trends, and voracious corporate and investor appetite. Companies such as Internet software and services, e-commerce, telecom, financial tech, cybersecurity, data analytics, social, travel tech, and auto tech are the world’s major players.
The main drivers for M&A in this sector are the creation of revenue growth, improved efficiencies, acquiring key talent, and staying ahead of competitors. It can be more efficient for a big tech firm to buy a smaller technology company in order to gain new functionality or services without creating them itself. It also serves as a pathway to ease into newer areas, as non-technology companies look to acquire technology companies to avoid disruption.
Mergers and acquisitions are commonly used as exit strategies for businesses in the technology industry. Company owners tend to prefer to cash in through M&A versus IPOs because IPOs can take longer and involve more regulatory authorities.
The Software Sector
Enterprise software and software as a service (SaaS) companies comprise a major segment of the technology industry. IT, data and cloud-based services have permeated every field of business in the world. Traditional and legacy software providers are using M&A in order to remain relevant. Healthcare, financial, and customer relationship management services software are continually in high demand. And digital marketing deals play a key part in the software M&A landscape.
Tech Company Valuations
Technology businesses that garner the highest company valuations for M&A typically share the same set of qualities:
- Reliable growth metric performance
- Good product/market fit
- Above-average margins
- Strong and predictable cash flows
- Positive key performance indicators
- Low owner involvement
- Streamlined operations
- A formulated exit plan
Additionally, investors are usually willing to pay more for businesses that have well-built brands because they are able to focus on long-term growth strategies without worrying about being eclipsed by intense competition while changes are being made.
In the technology sector, careful due diligence is especially important to coordinating a successful deal. In an industry where lifecycles can be short and technologies can change quickly, there is great risk. Understanding the future relevance of the product or service is key. If a company is profitable today, it does not mean it will be tomorrow, making growth potential a larger motivating factor for M&A than current profitability. Therefore, in addition to financial due diligence, there needs to be a high level of technical and commercial due diligence. There are intellectual property issues, and due diligence must fully assess patents, copyrights, trademarks, domain names, trade secrets, and mask works
Technology has completely blurred global borders, which greatly increases opportunities in M&A. While acquirers can expand their worldwide reach, this can also make the processes more complicated and time consuming for several reasons.
- Countries have varying and evolving regulations regarding technology and privacy, as well as tax and labor-related factors.
- Integration becomes more complex because of cultural differences, language barriers, and variances in corporate philosophies.
- The geographical distance between the companies can also make coordination difficult when trying to communicate in opposing time zones.
- Geopolitical factors can cause uncertainty and influence the feasibility of deals.
All of these circumstances change the implications for M&A strategies and calls for heightened expertise in dealing with cross-border transactions.
If you are considering a merger or an acquisition, you will love the way we do things at Benchmark International. We are motivated to achieve all of your aspirations and will never present you with a deal that we think will fall even the slightest bit short of your wants and needs. Count on our industry experts to use their global connections to deliver the right options for you.
Americas: Sam Smoot at +1 (813) 898 2350 / Smoot@BenchmarkIntl.com
Europe: Michael Lawrie at +44 (0) 161 359 4400 / Enquiries@BenchmarkIntl.com
Africa: Anthony McCardle at +27 21 300 2055 / McCardle@BenchmarkIntl.com
ABOUT BENCHMARK INTERNATIONAL
Benchmark International’s global offices provide business owners in the middle market and lower middle market with creative, value-maximizing solutions for growing and exiting their businesses. To date, Benchmark International has handled engagements in excess of $6B across various industries worldwide. With decades of global M&A experience, Benchmark International’s deal teams, working from 12 offices across the world, have assisted hundreds of owners with achieving their personal objectives and ensuring the continued growth of their businesses.