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Q1 2019 Information Technology Industry Spotlight

INSIGHT ARTICLE  | 

Spotlight

So much heed has been paid to application software and the shift to cloud that at times there is a lack of attention on the criticality of the infrastructure underpinning the software continuum for businesses and consumers alike. Fortunately, as the ongoing rumble of 5G rollout continues, telecom and technology players alike are focusing efforts on not only upgrades but additional investment to ensure their suites of products and services are up to date. Especially for telecom companies, the rollout of 5G will prove a positive driver for years, in terms of employment, contracts and more. Security concerns between nations in an era of heightened political tensions – e.g. the roiling debate centered on Huawei Technologies – will prompt domestic investment and policies looking to foster intranational innovation. It could also lead to some delay as other devicemakers look to improve their offerings to be on par with customers’ demands. Although the ripple effects will take some time to manifest, multiple tangentially related sectors will also experience quirks in supply-and-demand dynamics, namely mining and construction. That temporal element is critical to emphasize – the 3G to 4G transition took some time, and still is exerting some effects as developed cities grappled with better integration of extant infrastructure, licensing, development and more. Accordingly, 5G will also contribute to a sustained period of domicile by domicile penetration, shifting first from industrial and enterprise eventually to consumer, according to RSM.

Last but not least, once 5G is initiated, a key consideration will be its own network effects, especially in the realm of data mining for myriad purposes. Awash in more data than has ever been created before in human history, fields such as targeted advertising will only further leverage automation of insight creation based on greater data streams rendered viable by 5G, and consequently integrate consumers’ online environments even further. Enterprise solutions, on the other hand, will utilize such analysis to improve and automate processes, retaining human talent in critical junctures.

Big picture

How the mergers and acquisitions (M&A) cycle has evolved during a remarkable decade for the information technology (IT) industry has been an intriguing case study in sustaining of highs. Per RSM research, not only is automation poised to disrupt multiple industries, but also it could add even more value than what greater technology usage has already accomplished since the turn of the century. Such intensification and diversification are reflected in the highs achieved in the IT M&A cycle, which achieved multiple quarters of over 1,000 transactions in Europe and North America between 2015 and 2018, with hundreds of billions tallied in deal value. But what is intriguing is that even as software continues to transform into a horizontal rather than a pure vertical, in that it permeates every industry to some degree now, much M&A is still centered in vertical plays.

“Multiples simply tend to be too high to go truly horizontal,” says Alex Weiss, partner with transaction advisory services at RSM. “Much of the value we see in the market is derived by buyers that have a broad depth of knowledge across an entire vertical that can then leverage expertise post-close. So education, health care and fintech are all still seeing vertical consolidation.”

As verticals continue to consolidate, while incumbents look to scoop up smaller rivals or even venture-backed businesses to supplement or complement research and development (R&D), IT M&A looks set to stay characterized by high competition amid dynamic dealmaking, consequently.Looking ahead

Looking forward

Once again, the positive factors for technology M&A still outweigh any bearish factors. Macroeconomic growth may slow somewhat, but tech’s pervasion ensures its ongoing popularity as a source of both innovation via acquisition and consolidation. Although often harped upon, cybersecurity is perhaps one of the most common threads across the entire realm of IT. As RSM research reveals, the number of data breaches has doubled in the past decade, yet 2018 fortunately saw fewer than 2017, as enterprises both large and small realized the extent of their vulnerabilities. Less fortunately, however, the severity of said fewer breaches has increased. However, businesses are aware and primed for action. In Q1 2019, the RSM Middle Market Leadership Council conducted a survey that found 55 percent of middle market business leaders expect it likely that unauthorized users will attempt to access their organization’s data or systems in 2019—a significant increase from 47 percent in 2018. A clear majority accordingly were investing in functions dedicated to data security and privacy, updates of security protocols and privacy policies, and more defensive measures. Although the costs of data breaches are sufficient to prompt action, it could well be the case that eventually the intersection of the monetization of data and security overlap even further, as governments seek to legislate consumer protection and yet not thwart businesses’ growth. In short, more holistic solutions for cybersecurity problems of all kinds are primed for robust growth.

Our Insights for Technology Companies newsletter will keep you up to speed on these and other trends. In addition, RSM’s latest e-book, Scaling Up: Successfully Growing Your Technology Company, offers insights related to preparing your business for future growth.

 

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