Q3 2018 Technology Industry Spotlight
INSIGHT ARTICLE |
The most-recent volatility within public equities served as a good reminder that technology stocks, in particular the famed FAANGs—Facebook, Apple, Amazon, Netflix and Google—have alone been responsible for a significant portion of the remarkable gains in markets over the past few years. That bullish backdrop only further encouraged a hefty volume of dealmaking on all fronts. Strategic players, chief among them those aforementioned tech giants, snapped up startups, even to the rate of one per week for a stretch. Financial buyers, on the other hand, sought exposure to fast-growing private companies that were reaching levels previously unknown within private markets, due to the availability of capital and the sheer scale now achievable given technological advances. Since none of those factors have significantly changed, M&A looks to hold at the robust tallies they have recently exhibited, even into the second half of the year.
“Market sentiment is still strong,” says David Van Wert, partner in transaction advisory services at RSM US LLP. “The headlines may say a tech sell-off is beginning, but by and large, M&A still seems strong and participants unconcerned.” For all the talk of a sell-off, until true downtrends occur, stocks remain high enough that corporate acquirers can still utilize them in transactions, although cash hardly tends to be a problem for many of the larger entities. Given persistently high pricing, deliberation in due diligence remains paramount for prospective buyers. “Any correction also changes dynamics potentially in favor of other types of buyers,” Van Wert states. “Take-privates could tick up if private equity buyers can now justify a company whose stock has dipped, for example.”
“Even if some opportunities can be derived from a market correction,” says Van Wert, “in general, multiples still look set to remain high.” In short, bullish factors still outweigh bearish ones. Consolidation will continue, primarily driven by incumbents snatching up startups and market leaders looking to integrate additional offerings. PE firms’ inroads into technology are also to be expected to at the very least maintain—tech-focused firms such as Vista Equity Partners have been able to achieve significantly promising results with software companies in particular, which should only encourage imitation. Moreover, as the number of sophisticated PE shops proliferates within the technology industry, venture-backed startups will continue to view them favorably as an alternate exit avenue, and the size of that population suggests that could be a healthy chunk of potential deal flow going forward.
It’s difficult to foresee any truly potential onus incurred by the Wayfair decision that could dampen sentiment around business prospects on the part of small- to medium-sized enterprises and lead to them entering sales processes. Proportionately, it’s clear larger companies like Amazon are able to engage in full compliance more readily given economies of scale and longstanding preparation. However, as Van Wert notes, the proliferation of relatively inexpensive back-office solutions such as those offered by Avalara can ameliorate costs even for small to medium-sized businesses. From there, further regulations down the road that finally evolve to match the reality of the digital landscape, particularly with regard to cybersecurity and consumer privacy, are to be expected.
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