Can tech and telecom leverage economic headwinds?

“I think we’re going to see a bigger fight for market share, and I think profitability in those areas might decline.”

Ronald Gothelf

Grant Thornton Transformation Managing Director

A Simply Wall St analysis shows that earnings and revenue continue to rise in the tech sector, but that the total market cap has dropped. “I think we’re going to see a bigger fight for market share, and I think profitability in those areas might decline,” said Grant Thornton Transformation Managing Director Ronald Gothelf. “It will vary, partly based on the type of provider you are in the technology industry.”

Company size is another factor, with many large companies looking for acquisitions, small companies preserving cash and mid-size companies striking a balance. But almost every company can benefit from better cash management, operational efficiency and product innovation. Now, companies need to weigh whether it’s the right time for these opportunities and others that can help them turn the headwinds around.

“I think that there are sellers who have more realistic expectations about valuation now than they did a couple of years ago.”

Bryan Walker

Grant Thornton Strategy and Transactions Partner

“The big story is valuations,” said Grant Thornton Strategy and Transactions Partner Bryan Walker. “Public company valuations have come down, and it has reset expectations on the private seller side. I think that there are sellers who have more realistic expectations about valuation now than they did a couple of years ago.”

“Everything that’s been driving M&A — dry powder in private equity, cash on corporate balance sheets — all of those fundamentals are still there,” Walker said. “Private equity investors in software are still talking about good pipelines.”

So, what questions can you ask to make sure your company (or the one you want to acquire) is healthy?

The changing job, customer and competitive markets mean that many companies need to restructure for more effectiveness and efficiency. “When you have a high rate of growth, you tend to worry less about your efficiency and more about expanding your growth or geography,” Perkins said. As growth slows, priorities shift. “There are some things that you can do to take advantage of this pause in growth, like restructure and rationalize infrastructure and processes.”

Every company will have unique opportunities to improve efficiency. To find those opportunities, start with analysis. “When you’re investing in infrastructure — especially with a remote workforce — it’s especially important that processes are clearly understood and clearly defined,” Gothelf said.

Once you know where you can improve, you need to allocate sufficient resources to the effort. “The companies that rationalize their infrastructure and processes need to deploy their cash to do things more effectively inside their organization. Many middle-market tech companies need to manage their cash and be much more efficient and effective in their operations,” Perkins said.

Stability might seem hard to find in the tech and telecom industry, especially for smaller companies. “The emerging tech companies are going to struggle for funding and will be mostly focused on cash preservation,” Perkins said. But there are some factors that can help you find as much stability as possible.

Subscription and as-a-service models have become essential starting points for tech revenue stability, and there are still some new ideas to explore. Gothelf explained, “In many situations, it’s the classic razor-and-razor-blade model being applied to technology.” Companies can look for new opportunities to apply the razor-and-razor-blade (or printer-and-cartridge) pricing model to products in their sphere.

“Everybody loves the recurring revenue model in software. When the external economy is driving your growth, you can cover up some churn,” Walker said. “But when things slow down, the best in class focus on retaining their customers — which in some cases involves deployment of tools or working with other companies that help them capture renewable revenue.”

To keep customers, you need to keep demonstrating value — even new value. This is especially important to keep business customers, which can give you more resilience than a purely consumer customer base. “Have a value proposition that demonstrates how your tool will save customers money,” Walker said. “That’s how the sale gets repositioned,” Perkins added. One of the ways to demonstrate value is through the ongoing shift to cloud-based services and solutions.

“One of the growth areas for tech will be the continued transition of companies to cloud,” Perkins said. “I don’t think that’ll slow down. I think there will be incentives to move more quickly. If you think about clients that had a big tech project on the board, which was going to cost six or seven million dollars to implement and begin to show a return 18 months after it’s implemented, they can move to the cloud and go to an op ex model very quickly.”

“I think you’re going to see a continued — and even accelerated — move to the cloud, and to companies positioned in that space who can help,” Perkins said.