Tech industry leaders have a positive outlook on M&A in the next few months, and that could have implications across the industry.
“M&A has always played a big role in the growth of this industry,” said Grant Thornton Transaction Advisory Services Principal Bryan Walker. Tech companies often use mergers and acquisitions to make strategic moves, acquiring new capabilities or products that can have transformative effects on market share.
Transformative moves could be on the horizon, as M&A professionals in the recent Grant Thornton M&A survey expect an increase in the tech industry’s activity and valuations.
“Overall, I think this is a pretty rosy picture,” said Grant Thornton Transaction Advisory Services Principal Bill Pollatos. “Some companies that were bought for a certain price will be struggling to find that valuation on exit. So, I think it’s going to be a bit turbulent for some, but given the dry powder with private equity and the hold periods extending there is a need for businesses to transact.”
“There are some large PE firms making big bets — and that will help those valuations,” Walker said. Many industries anticipate an increase in M&A activity in the next six months, and the M&A professionals in Grant Thornton’s survey predicted that the technology, media, entertainment and communications industry would see the most activity by far. “Will we return to the heyday of ’21?” asked Grant Thornton Transaction Advisory Managing Director Vic Sandhu. “No — but there’s a lot of dry powder that needs to be deployed.”
So, with strategic and transformational moves on the horizon, how should tech companies prepare, and what’s different from transactional cycles in the past?
Focus on profitability
In recent years, tech companies have seen market turbulence swirl from the pandemic boom to the cost cuts that followed, and now a return to growth — but it needs to be the right kind of growth.
“It’s not just growth for growth’s sake,” Pollatos said. “You need to show that your growth is profitable.” Companies need to prepare for this profitable growth, or show buyers they are prepared, by checking some key alignments:
- Optimize operations: Companies need to ensure their operations have been streamlined and structured for agility and scalability.
- Optimize client base: Companies need to ensure they understand their current and target client base segmentation, how their current products and services align, and where there are opportunities.
- R&D spending: Companies need to be prepared to spend on R&D — cost cuts cannot drive growth on their own, and companies need to show their path to growth.
With these alignments in place, companies can put themselves on the right side of the incoming wave of transactions.
“You have to be ready to respond to investor expectations, and investors expect you to be aligned and efficient,” said Grant Thornton Technology Industry National Leader Andrea Schulz. Companies should already be able to show automation and efficiency measures in areas like risk management and finance. Now, they need to be on the path to profit.
“You have to show your plan for profitability,” Pollatos said, because the rising valuations will be fueled by results. That could separate the companies that show profitability from those that don’t.
Connect your business plan and transaction plan
Your business plan is the guiding light for many of your leadership decisions, and M&A decisions might be the most important place to use that guidance.
It can be tempting to consider M&A purely to gain valuable skills, market share or brand recognition, but your decision needs to align with your business plan. “You need to have a clearly articulated strategy, so that you can evaluate how a potential transaction advances that.”
M&A can address specific needs or tech capabilities in your plan, so consider where you have such needs. “Consider your AI strategy, and how that factors in,” Walker said. He added that many companies also use M&A to address cybersecurity needs.
Cybersecurity can be a critical, but underdeveloped, part of a tech company’s product offerings. Software companies often need to shift from developing new capabilities to securing those new capabilities. “It’s like the shield and the sword, where cyber is the shield,” Sandhu said. New capabilities can come with risks, especially if they involve new integrations or technology partners, as AI technology often does.
As companies look at how M&A can advance — and protect — their future business, they need to get ready for the next stage of competition.
Get ready for the next stage
Whether you’re evaluating your own company or a potential acquisition, you need to consider the next stage of competition in the tech market. “M&A could be especially active for SaaS platforms that have an AI component,” Pollatos said.
However, Pollatos said, AI alone isn’t enough to differentiate any product in the crowded tech market. “AI is table stakes at this point,” Sandhu agreed. “If a company doesn’t already have a strategy addressing AI, then it might not be worth investment. The next level is: How do we service companies better?”
Beyond just adding AI, companies need to look at how they will serve existing and potential clients in better ways. They need to consider where, how and when there are opportunities that will reposition them in the market.
“There will be transformative events in the large-cap market that will filter down to the mid-market,” Sandhu said. However, he added that mid-market companies shouldn’t sit on the sidelines. With the right perspective, you could see transformative opportunities within your reach. “It’s important to realize that you can have these transformative events that don’t mortgage the company.” You just need to know where to look.
Contacts:
Andrea Schulz
National Managing Partner, Technology Industry
Partner, Audit Services, Grant Thornton LLP
Principal, Grant Thornton Advisors LLC
Andrea Schulz serves as Grant Thornton’s national managing partner for Technology. In this role, she oversees the growth and operations of the firm’s Technology industry practice, which encompasses a full range of audit, tax and advisory services.
San Jose, California
Industries
- Technology, media & telecommunications
Service Experience
- Audit & Assurance
Bryan Walker
Principal, Transaction Advisory Services
Grant Thornton Advisor LLC
Bryan is an advisory managing director based in San Francisco, specializing in transaction services. He has more than 20 years of experience providing financial due diligence to private equity and corporate clients.
San Francisco, California
Industries
- Healthcare
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Retail & consumer brands
- Private equity
Service Experience
- Advisory
- Transaction advisory
Bill Pollatos
Principal, Transaction Advisory Services
Grant Thornton Advisors LLC
Bill is a Principal in our Transaction Services practice with over 16 years of experience. He has specialized industry expertise in the technology sector and is a leader of the firm’s M&A technology team as well the firm’s most significant technology transactions.
Orange County, California
Industries
- Healthcare
- Manufacturing, Transportation & Distribution
- Technology, media & telecommunications
- Transportation & distribution
- Hospitality & Restaurants
Vic Sandhu
Managing Director,
Transaction Advisory Services
Grant Thornton Advisors LLC
Vic’s expertise lies in leading teams to deliver operational excellence in buy-side and sell-side M&A financial diligence deals, particularly within the technology sector.
San Francisco, California
Industries
- Technology, media & telecommunications
- Private equity
- Media & entertainment
Service Experience
- Transaction advisory
- Tax Mergers & Aquisitions [M&A]
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