United States

Q2 2019 Information Technology Industry Spotlight

INFOGRAPHIC  | 

Spotlight

As RSM recently noted, 5G wireless networks could provide significant potential for multiple industries, with data processing and streaming set to increase in speed. More immersive digital environments will be rendered possible, enabling faster iteration in manufacturing, remote health care access and more. However, as with any new technology, there are significant implications to consider. Complex infrastructure will need to be built or revamped in order to enable 5G adoption at scale. Some cities in the US and elsewhere already boast 5G, but much broader rollouts will occur in the next 12 to 24 months. Cities ramping up preparation should consider the full gamut of services necessary in order to implement 5G, while ensuring they have identified all components of infrastructure that will require additional investment. This isn’t as simple as it sounds. Concerns around the build-out of 5G from a security standpoint, for instance, may call for new protocols and increased investment of both time and capital. Cybersecurity is increasingly recognized as a key hurdle for dealmakers and companies to address, in both diligence and operations. End users and operators are equally vulnerable, if in different ways, with the gradual integration of more connected devices into homes and workplaces. Such additional complexities are what will make the installation and implementation of 5G a matter of years, not months. However, this will only aid in providing overall economic benefits and jobs; some estimates place both figures at $3.5 trillion and 22 million jobs, respectively, to be derived from the entirety of the 5G value chain.

Big picture

After a nearly record-breaking year in deal value, the mergers and acquisitions (M&A) cycle in information technology (IT) has shown signs of slowing down. Through H1 2019, $257.4 billion in aggregate deal value has been recorded in Europe and North America across 1,554 transactions. That means the full year will likely record less deal value than in 2018 or 2016 while representing a sizable decline in overall volume. However, these diminished figures must be put into historical context. The four-year run from 2015 through 2018 was remarkable for the sheer volume of activity, with nearly 4,000 deals completed annually. Even if 2019 fails to keep pace, it should still post results that are historically robust. In short, the M&A cycle is far from crashing; rather, it appears to be moderating after an unusually intense period.

Multiple factors, both cyclical and secular, are contributing to this moderation. High prices exert a subduing effect in any heated environment, and IT multiples have been at or near record highs in general. Following the first significant waves of consolidation in key segments—e.g., semiconductors—and the Software-as-a-Service (SaaS) proliferation earlier this decade, a period of relative calm is now occurring, given the transition to cloud-based services is widespread. The next phase of the M&A cycle may already be in its early stages, as the groundwork for new technological adoption, such as the fifth generation (5G) of wireless networks, begins to proliferate.

“The US and global economies are experiencing one of the longest periods of growth in recent history,” stated Alex Weiss, partner with transaction advisory services at RSM US LLP. “Well-founded or not, there are persistent concerns that could end; fortunately, the technology industry tends to be more resistant, given software and systems are critical to operations.”

Looking forward

On the dealmaking side, as prices eventually subside and overall M&A cools, potential dealmakers will be encouraged to pick up the pace again. Strategic and financial buyers still have near-record amounts of capital on hand, while the cost of capital remains extremely cheap by historical standards. With ample means, the limited supply of choice targets will be the primary constraint for market dynamics. The role of the next generation of tech companies, as they go public and likely embrace more acquisitions, presents another interesting key factor to watch. For example, Uber started acquiring companies before its IPO; now, as a listed company, it could well bolster the scope of its offerings by engaging in additional M&A of midsized IT companies.

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.

 

Datagraphic available for download.


Additional industry dealmaking insights

Private Equity Subscriptions

Subscribe to Quarterly Industry Spotlights

(* = Required fields)

Contact our professionals

Contact us by phone 800.274.3978 or
submit your questions, comments or proposal requests.