Dealing with M&A for technology companies


Dealing with M&A for technology companies

Successfully selling a technology driven company requires specific attention points, especially considering changing dynamics in the buyer universe, which increasingly includes traditional companies.

Dealing with M&A for technology companies

From 2013 onwards the global M&A market has recovered after some years of lower M&A activity. M&A in TMT industries (Technology, Media & Telecom) has a substantial contribution of approximately a fifth of total transaction volume and outpaced global M&A in 2013-2016 (10.5% versus 7.8% CAGR). Within the TMT industry most transactions occur within the Technology domain, this share increased from around 67% in 2013 to around 71% in 2016.


Global M&A transactions volume

Technology M&A within TMT M&A

Transformational M&A and industry convergence

The increase in the number of technology transactions coincides with changing dynamics in the buy-side. Until recently the majority of acquirers in TMT transactions were industry acquirers, this has however flipped in 2016 in combination with an increase in transformational M&A. An important driver for this phenomenon is the search for growth, where acquiring technology serves this goal in two ways.


Acquirer type in TMT and Technology M&A

First, transformational M&A simply occurs in order to benefit from higher growth expectations in technology driven industries. Secondly, the current economy is characterized by digital transformation, where technology increasingly becomes an integral part of primary business processes. Failing to adapt to these market developments could weaken the competitive position and harm future development.

At the same time transformational M&A is a way for companies to create value outside of the own business or industry. Traditional industry borders are fading (“industry convergence”) which enables businesses to create value in the broader ecosystem. Acquirers are increasingly focusing on realising growth based on industry convergence. Exploring new types of collaboration within these ecosystems provides an opportunity to accelerate innovation, from a consumer as well as from an organisational perspective.

The larger share of non-industry acquirers is also driven by increasing financial sponsor activity. “Today, even the more traditional private equity funds increased their focus towards TMT as return expectations can be more favourable compared to traditional industries (e.g. food, transport, manufacturing), amongst others due to higher growth” states Remco Goes, Director TMT M&A at Deloitte Corporate Finance.

Key attention points M&A process

Apart from the strategic rationale for engaging in technology M&A, the actual M&A process faces some important aspects in comparison to non-technology M&A transactions.

Identify potential acquirers in the broader ecosystem

Given that the potential acquirer can come from many backgrounds, this requires a more creative approach towards selecting potential acquirers. Besides direct competitors or companies that pursue vertical or horizontal integration, potential acquirers should be identified in the broader ecosystem. Remco Goes: “the shift in backgrounds of acquirers results in different perspectives and approaches and really adds to the dynamics of M&A processes”.

Importance of commercial and technical DD for technology roadmap

In an era of accelerated technological developments, disruptive innovations and unicorns, it is more important than ever before to make the right (technology) acquisition. Lifecycles are shortening and this inherently decreases the odds that today’s leading technology will still be a winner tomorrow. This implies that acquiring technology is no longer just an opportunity, but also comes with greater risk.

In addition to regular financial DD aspects, commercial and technical DD should gain in importance. In order to get a thorough understanding of the technology roadmap, the focus during DD should be amongst others on analysing functionalities, scalability, further development potential, essential organisational capabilities and financing options.

Sufficient target and acquirer interaction

Simultaneously, it is important for selling shareholders to stress the further development potential of the company based on the projected technology roadmap. The valuation of technology companies is rarely based on current profitability levels, but rather on the potential of the (joint) business case.
As such, it is essential to facilitate sufficient target and buyer interaction in order to develop the joint business case. More guidance for acquirers in identifying important value drivers is likely to result in more acceptable valuation estimates. 

Allow for flexibility in structuring

Potential valuation discussions can be mitigated by a more flexible approach towards transaction structuring. Transactions should be structured such that both parties are comfortable with transaction terms. Other than the plain vanilla 100% acquisition, additional options such as partnerships, joint ventures, minority investments and corporate venturing models should be considered.

Consider integration aspects

Besides the potential advantages, the increase in cross-industry transactions could potentially add complexity to the M&A process and post-merger integration. Acquiring and integrating companies with different sales or business models can be a challenge and should therefore be addressed in the early stages of the M&A process.

Authors: Geert Moed
Source: Thomson M&A

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