Technology companies leverage M&A for innovation and growth

22 December 2017 Consultancy.uk

Technology, media and telecommunications companies find themselves in a period of rapid change, as digital and new technologies shift borders and transform whole industries. New analysis shows technology firms are increasingly interested in acquiring companies, in a bid to grow, access innovation, and expand into new segments.

While merger and acquisition activity has been in a state of flux in recent months, technology investment remains one of the world’s fastest growing sectors, driven by innovation and disruption. The industry, has, in recent years, sought to leverage strategic mergers and acquisitions to acquire access to broader tools, as well as users’ data, among others. Facebook’s acquisition of WhatsApp for instance, or Apple’s acquisition of Shazam are examples of such strategic moves.

The industry remains well endowed with cash, while growing disruption in the Fintech space means that tech companies continue to eye ways of competing across traditional borders – with acquisitions of start-ups being a popular investment route. To better understand current trends within the technology sector, EY released its ‘Can increased M&A competition and better deal making coexist?’ report. The report is based on responses from 3,000 CEOs, of which 621 respondents were from TMT companies.

Bullish tech companies

The tech sector was found to be bullish on the global economic picture, with 83% of respondents to the latest survey saying that global economic growth is improving from their perspective. This represents a solid 20% increase on the same question from the April edition of the survey, and a massive jump from 17% in the survey result of October 2016.

The research notes that the number of respondents who say that their perspective on global economic growth as declining fell from 22% last year to 1% this year. Firms are also bullish about their own prospects for growth, with 80% citing improvement and 20% stability – market capitalisation in the industry grew by 43% from last year.

Confidence in financial indicators

In terms of confidence the rapid growth of tech industry, market capitalisation is reflected across key indicators. Respondents’ level of confidence at their sector level for corporate earnings hit 71% in the latest survey, a massive 70 percentage point increase from the same period last year. Credit availability increased significantly too, while short term market stability was cited by 68% of respondents as improving. The industry is well positioned in terms of equity valuations / stock market outlook, cited by 46% as improving and 51% as stable.

The current strong position of tech industry respondents places them in a comfortable position to consolidate, expand and access key technologies and talent – through M&A. The number of respondents that expect to pursue M&A over the coming 12 months stood at 57% in the tech industry, a seven-percentage point increase on the previous year and well above the 33% recorded in October 2013.

Deal making intention

The tech industry has also increased its acquisition appetite to that of the wider global industry, after considerable divergence between October 2015 and April of this year. The firm notes, however, that while intentions were relatively subdued for the 2015-16 period, actual deal activity was – like much of the wider industry – booming. This year will likely see deal volume decrease by 9% and deal value by 34%.

The key drivers cited by the tech firms surveyed reflect wider trends in the strategic M&A space. The top cited reasons include acquiring innovation (24%) and growing market share (also 24%). Access to new geographies and additional talent follow, at 18% and 16% of respondents respectively. Reactions to changes in customer behaviour and securing supply follow, at 14% and 4% respectively.

Market innovation drives M&A pursuits

Commenting on the sector’s M&A appetite, the authors stated, “The question of how much of today’s tech sector optimism translates into tomorrow’s done deals will be answered in 2018. Tech companies can work to realise their deal making intentions by taking deliberate steps indicated in these pages: re-evaluate their portfolio review process, take advantage of modern analytical tools, prepare for an increasingly competitive M&A market and pre-plan for integration.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.