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Tech M&A Market: Demanding Sellers, Fewer Buyers

Corum Group, a merger and acquisitions advisor, which works with privately held technology companies, has put out its annual report, which tells us a good deal about where the action is in the tech world outside of the public markets: focusing on strategic acquirers on the one hand and private equity on the other.

Macro Backdrop

The report acknowledges that 2019 posed “a mountain of worries,” including the worsening through much of the year of trade relations between the US and China, which was bad when the year began.

Nonetheless, as Corum also reminds us, the public equity markets were up on the year to a breathtaking degree, gaining a third of their value in the leading tech indexes. The bull market that raged throughout the 2010s is “aging,” the report reminds us, but it “charges on.”  It’s the IV drip of easy money offered by the world’s central banks that is doing the trick.

Strategic Acquirers

What did the cheap money and the age of the bull mean for venture capital in 2019? First, the number of VC exits rose. The “smart money” wanted to take some of its winnings off the proverbial table.

They also meant that although the strategic acquirers continued to look around, they were not quite as active in 2019 as they had been. There were 71 megadeals involving strategic acquirers across the six sectors Corum tracks. Infrastructure was the most megadeal friendly, with 16 such deals, followed by internet (4) and horizontal (14).

Corum makes the point that the list of top strategic acquirers is shortening. The M&A market is a seller’s dream, so strategic buyers are finding it difficult to find deals at acceptable prices.

The great exception on the buyers’ side is Accenture, which in 2019 made 27 acquisitions, up from 23 in 2018. This is the Ireland-domiciled financial services company that in 2019 acquired Happen, a London-based “digital innovation consultant.” Accenture has been active in all the key IT areas.

Microsoft was the second busiest strategic acquirer, active in education, gaming, and the Internet of Things. The gap between first and second in this league table is a large one (27 acquisitions vis-a-vis 12). Microsoft was also busy through its subsidiaries such as GitHub and LinkedIn.

Apple and Dell were likewise both active acquirers through 2019, as was Amazon. Amazon, which made just five acquisitions in 2018, stepped the number up to 11 in 2019.

Broadridge Financial Solution joined the list of top strategic acquirers this year. Broadridge is a financial services provider that spun off from ADP in 2007. In 2019 it made 10 purchases. As an example, it acquired ClearStructure Financial Technology, a provider of services to the private debt markets, in November, for an undisclosed price.

Private Equity

Although strategic acquirers are becoming scarcer, purchases by private equity funds continued to grow in 2019.

The top four most active private equity funds were the same in 2019 as they had been in 2018: Vista, Thomabravo, TA Associates, and Insight. Vista not only bought more companies than any other PE firm, it bought 20 more companies than did the top strategic acquirer.

PE firms are competing with each other for bolt-ons, that is, deals for entities that can be added to or even “tucked into” entities already in the funds’ portfolios, rather than new platforms. Indeed, the ratio of bolt-ons to platforms has been rising over time. It was 2.7 to 1 in 2017 and 3.6 to 1 in 2018. In 2019, it was 5.5:1.

In terms of broad trends, Corum’s data shows that values in all six markets have been rising over the last three years. Although Vertical was briefly the high-riser in both sales and EBITDA multiples in Q3 of 2019, Horizontal finished 2019 at the top in both metrics.

Values in infrastructure have remained steady over the last three years.

One big functional trend in recent years has been “focused IT services,” that is, a drive toward differentiation in such services. This trend has helped move IT multiples to finish at all-time highs.