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Q1 2018 Technology Industry Spotlight



Let's talk talent in tech

Although practices around cybersecurity and user data may be currently dominating headlines, an equally critical topic remains important across the technology industry: the availability of talent. For some time, high labor costs and challenging sourcing of necessary employees have been commonly cited concerns among startup employees as well as middle market company officers. But as always, businesses are adapting. As Steve Ingram, the head of RSM US’s technology practice, recently stated, “Technology companies are leveraging virtual working environments to hire the employees they need, from engineers and programmers to customer service representatives.” Although that trend enables cross-border labor sourcing, it also furthers companies’ ability to integrate centers across different U.S. states, precluding the need for concentration on the coasts in traditional tech hotspots. It’s important to note, however, that centralized leadership and experienced management onsite remain crucial, with further guidance to be found in RSM US’s labor resource center. As the hunt for talent remains competitive, companies will continue to tinker with best practices for sourcing as well as hiring, which will lead to further refinement in typical workplace models. Although it is tempting to try to standardize too much, the reality is that even within one company, there will be different approaches that suit separate departments better, organized more around function than over-emphasis of form. For middle market companies in particular, retaining talent by inculcating apprenticeships and other training programs that incentivize employees to stick around will be an important point to emphasize.

Key findings

The technology landscape remains dynamic, characterized by interlocking series of technology innovation and adoption cycles. Cloud-based services such as Dropbox are conducting initial public offerings (IPOs), demonstrating that there is sufficient demand and differentiation for a variety of such enterprise product suites even in the face of competition from incumbents among the vaunted FAANGs (Facebook, Amazon, Apple, Netflix, Google). That is primarily due to adoption cycles, as early enterprise adopters built around innovative product suites accessed via subscription models were able to gain footing even as incumbent giants like Microsoft were slower to react. However, such cycles do tend to overlap eventually and produce frontrunners, leading to consolidation and turnover even at the upper heights of the market.

Consequently, technology deal-making remains more resilient than activity seen in other sectors. Swifter product life cycles, still-high equity markets and relatively cheap debt continue to encourage consolidation among strategics as well as acquisitions of startups at a decent clip. Meanwhile, financial sponsors are still avidly pursuing middle market software companies, lured by the promise of recurring revenues based on models with low operating costs. Purchase prices remain high, however, contributing to decelerating transactional volume over the past few quarters. Looking forward, however, acquisitive interest remains keen enough that the mergers and acquisitions (M&A) cycle appears primed to remain resilient.

Looking ahead

The narrative of synchronized global growth remains intact, although there are some troubling signs given macrofinancial trends among sovereign debt loads and contentious political topics such as trade. The technology industry has benefited considerably from easy monetary policies and the rise of equities, both of which fueled M&A to a strong degree. At the same time, tech's especially resilient M&A cycle is more indicative of how multiple sectors are expanding or adapting their exposure to relevant technologies.

Accordingly, the technology industry looks set to enjoy considerable M&A levels throughout the rest of this year. Moreover, the industry itself will continue to see transformation as labor markets diversify, more niche market opportunities emerge due to increasing automation, and political headwinds engulf the primary tech monoliths such as Facebook and Google. It is unlikely that monopolistic positions in key markets will shift much over the next few years, despite aforementioned headwinds, so there will still be significant consolidation, particularly in the middle market, as larger acquirers scoop up startups and smaller companies and owners look to take advantage of fairly strong selling conditions as they persist. For private equity (PE) buyers, beginning to consolidate platforms and also still trading up the value chain, so to speak, by buying other PE-backed companies, will remain key strategies.

Datagraphic available for download.

Additional dealmaking industry insights

Q1 2018 Health Care and Life Sciences Industry Spotlight

Q1 2018 Health Care and Life Sciences Industry Spotlight

Significant opportunities for innovation and investment continued to define the health care industry through Q1 2018.

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Q1 2018 Consumer Products Industry Spotlight

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A large amount of dry powder combined with relatively few opportunities has created an imbalance in supply and demand.

  • May 17, 2018
Q1 2018 Business Products and Services Industry Spotlight

Q1 2018 Business Products and Services Industry Spotlight

Due to the disconnect between buyer and seller expectations, the market has recently experienced more broken deals than in prior quarters.

  • May 17, 2018

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