United States

Q2 2018 Technology Industry Spotlight



Cybersecurity and the tech industry

Cybersecurity is an issue that affects all companies to varying degrees, but for tech companies, in particular, it is a critical area of concern. Depending on the company, there could be significant exposure to threats on multiple fronts. To take one particularly dramatic example, hospital systems being held ransom could well occur again, as troubling as that is. Other companies that operate repositories of data for, say, PE portfolio companies, as well as PE firms themselves, could also prove suitable targets for attackers as they could yield richer payoffs given greater stores of data. "Savvy investors understand that having a detailed cybersecurity plan that has both proactive and reactive aspects is essential to avoid events that could be potentially very harmful financially and operationally," says Van Wert.

It should be noted that large companies aren’t the primary targets alone; middle market companies are just as much at risk. In partnership with the U.S. Chamber of Commerce, the RSM US Middle Market Business Index Cybersecurity Special Report highlights how middle market companies are increasingly landing in the crosshairs of cybercriminals, with the number of middle market companies reporting breaches nearly tripling in the last three years.

Big picture

The technology industry is in the later innings of a broad innovation cycle, while the dealmaking cycle is still running hot, in a common concurrence. The incumbent tech giants—Amazon, Facebook, Netflix, Apple, Alphabet and Google (FAANGs)—continue to enjoy monolithic positions in their core markets, yet their primary product lines remain, by and large, the same while they seek to access new markets. Across the globe, Baidu, Alibaba and Tencent (BAT) hold much the same position in China and, increasingly, beyond its borders. Consolidation is still running rampant across the market, bolstered by the incumbents’ efforts to stay abreast of technical developments. "Buyers are always looking for ways to accelerate top line growth, particularly for recurring revenue streams," says David Van Wert, partner in transaction advisory services at RSM US LLP. "Ideally, operating expenses follow an inverse relationship through cost rationalization, restructuring and synergies from combining with another company at the time of acquisition or through add-ons."

In the end, technology is an enablement of traditional methods of doing business, and as applications proliferate, software continues to eat the world, to borrow Marc Andreessen’s famous phrase. However, as software continues to replace the lower rungs of automated tasks, the innovation cycle is slowing, as hardware catches up and more difficult technical challenges, such as more sophisticated artificial intelligence (AI) programs to help thwart cyberattacks automatically, persist. Advances are being made, but for now, the continued consolidation in key segments, as well as amount of capital flooding into dealmaking and venture investment, signal that the next innovation cycle is largely in its early stages. The main trends for the middle market, in particular, are currently consolidation, integration and increasing private equity (PE) buyer activity, and this state of affairs does not look set to change anytime soon.

Looking ahead

The narrative of synchronized global growth is shakier than ever, as troubling macrofinancial trends among sovereign debt loads and contentious political topics such as trade, not to mention China’s uncertain path forward, are all combining in a potent mix. That said, such an environment may only encourage mergers and acquisitions (M&A) even further, as companies look to get deals done now before additional and potentially negative factors come into play. The ceaseless rise of equities continues to fuel M&A among tech companies to a significant degree as well. Thus, from a macroeconomic perspective, the tech M&A cycle looks primed to remain resilient.

When it comes to dealmaking conditions, however, the level of multiples being paid within the marketplace for tech companies, particularly those with recurring revenues that can justify significant, forward-looking revenue multiples, could dissuade would-be acquirers at some point. "Pricing remains high," states Van Wert, "propped up by highly competitive auction processes." PE buyers will continue to prop up volume, but focus on the smaller end or middle segment of the market, barring the occasional growth equity stake such as the recent $400 million investment in marketing company AppLovin by KKR. Accordingly, volume may diminish somewhat going forward, even as aggregate deal value remains robust given inflated multiples, but remaining within historically strong levels. "It’s a sellers’ market; and in addition to record multiples, sellers are demanding shorter processes," says Alex Weiss, partner in transaction advisory services at RSM US.

Datagraphic available for download.

Additional industry dealmaking insights

How can we help you?

To discuss how our team can help your business, contact us by phone 800.274.3978 or

How can we help you?

Events / Webcasts


Credit Fund Webcast Series: Market data and economic update

  • October 27, 2020


Enhancing family offices – webcast series

  • September 30, 2020


Carried interest regulations: Update for investment fund managers

  • August 13, 2020