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Q3 2019 Information Technology Industry Spotlight

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"Speed is the name of the game for both buyers and sellers in the current climate. Given geopolitical shakiness as well as broader concerns around any potential slowdown, buyers are prioritizing companies with metrics that exhibit resilience to any major impacts."

David Van Wert, Partner, Transaction Advisory Services, RSM 


Spotlight

As noted in a recent RSM Industry Outlook, broadcast television networks have actually outperformed the S&P 500 since the beginning of 2019, even as their advertising revenues have understandably waned due to the impact of on-demand streaming. That outperformance is primarily driven by so-called retransmission fees—the fees paid by cable, satellite and streaming platforms to retransmit local TV broadcast signals—and not by a spike in political campaign advertising dollars or the advent of sports seasons’ viewership. However, as those retransmission fees continue to grow, they help encourage significant M&A across local TV broadcasters.

This theme of consolidation is hardly novel to the broader IT space, as it has been a key proponent of M&A across the cycle in its later stages. Many headlines have dwelt on fintech consolidation over the past two years given megamergers such as that of First Data and Fiserv for $22 billion in the summer of 2019. It’s also worth noting the significant amalgamation among cloud services, for example, the absorption of Hortonworks by Cloudera for $5.2 billion in January 2019. As both fintech and cloud services continue to progress through their maturing M&A cycle, new specialties will gain attention. One prime contender is cybersecurity. “Cybersecurity is obviously paramount for the entire IT industry,” says Weiss. “While we’ve seen a shift in market appetite for pre-close cybersecurity due diligence, it’s not yet at levels we’d recommend given the low cost of procedures relative to the potential negative consequences of ignoring the issues.” However, it is likely buyers will start investing more heavily in cybersecurity measures—including through acquisitions—as the cost of data breaches continues to rise for companies small to large. A few prominent transactions signal the potential emergence of such cybersecurity consolidation in 2019 to date, including Cylance’s $1.4 billion purchase by BlackBerry in February 2019.

Big picture

The information technology mergers and acquisitions cycle has remained dynamic for years. The four-year stretch from 2015 to 2018 saw near or above 4,000 transactions close in the sector each year across Europe and North America, while aggregate deal values soared to record highs—2016 alone reached a staggering $672.2 billion. However, as deal sizes stay at prolonged highs against a backdrop of increasing geopolitical and economic tension, a downturn in volume over the past few quarters is suggestive of growing caution.

“High multiples’ persistence, combined with more aggressive acquisitive behavior and general preparation for any economic softening, point to the end of a cycle,” says David Van Wert, partner with transaction advisory services at RSM US LLP (RSM). “Many signs indicate that the cycle is in a late stage where buyers are getting more aggressive to get deals done, with no sign of a conservatism that usually emerges when a market correction takes place.”

With that said, the timing of such a market downturn is still unknown, so private equity (PE) investors and corporate buyers are still willing to pay top dollar for well-positioned IT assets. Not only does the massive hoard of PE dry powder continue to help bolster tech buyout activity, but the ongoing proliferation of software into multiple industries and consolidation among the earliest waves of software-as-a-service companies have aided the level of deal flow as well. Thus, all signs point toward the M&A cycle overall across IT moderating. The next phases of significant technological advancement and adoption are already slowly revving up (e.g., 5G across wireless). “The technology industry tends to be more resistant to political volatility and downward trends than other industries,” says Alex Weiss, partner with transaction advisory services at RSM. “Systems and software tend to be critical to operations, making them more elastic.”

Looking forward

It is reasonable to expect continued caution from deal-makers given signs indicating the M&A cycle is in its last stages. “There’s a clear divide between buyers in this exorbitantly priced marketplace,” says Weiss. “For PE, at the extremes, some take an aggressive approach and continue to be platform acquisitive, while others sit on the sidelines entirely. The majority is somewhere in between, spending increasing time executing on a rollup strategy where lower multiples and synergies yield value.” However, given the level of dry powder that PE has on hand, plus newer entrants flocking to the space, the IT M&A cycle still has plenty of supporting factors to keep deal values and volumes healthy.

As for the broader strategic M&A cycle, much of it will still be driven by consolidation and pursuit of inorganic, top-line growth in segments such as cybersecurity. “Historically, cybersecurity was viewed as a cost center—for example, as a way to spend money without getting anything in return,” Van Wert explains. “But now, given the risks of not ensuring your enterprises are secure, the potential costs dwarf actual cybersecurity spending.” Those are the same characteristics that will help identify IT segments where future consolidation and investment could occur, as even against an uncertain economic and political backdrop, deal-makers will still invest in technologies and arenas that are perceived as imperative or generating growth.

Our new Insights for Technology Companies newsletter will keep you up to speed on the M&A cycle 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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