This week on NVTC’s blog, Alex Castelli, partner and Technology Industry Practice leader at CohnReznick LLP, discusses the acceleration of investment and acquisition activity in the technology sector.
- It is no secret that valuations for high quality technology companies are at historic levels. This, combined with a strengthening economy, and an abundance of cash on the balance sheets of most strategic and financial investors, is helping to accelerate investment and acquisition activity.
M&A activity will continue to accelerate into 2015, as corporate buyers make strategic acquisitions to fuel future growth. CohnReznick’s 2014 Middle Market Private Equity Outlook predicted strong transaction and deal-flow in 2014, a forecast that has accurately reflected activity through the last half of the year. Many major technology companies, venture capitalists, and private equity firms have cash available and they are under pressure from shareholders and investors to utilize these assets in order to meet their investment objectives.
The latest research confirms that the current market conditions are fueling high valuations and high levels of M&A activity. Leading private equity data provider PitchBook reports that in 2014, there was an increase of almost 200% (based on multiples of their EBITDA) in the valuations of technology companies undergoing a M&A transaction. This figure is up from an average of 8.4x in 2013 to 17.1x to date this year. Interim figures from PitchBook also reflect that total capital invested is up 45% in 2014.
Technology markets go through regular cycles of innovation, and currently a number of core markets are experiencing such activity – including social media, mobile, big data analytics, cloud computing, storage, and security. These areas continue to attract strategic investors who recognize that many times, it makes more financial and competitive sense to acquire intellectual capital and property rights in these areas than it does to build them organically. Interested investors include not just traditional enterprise software companies seeking to innovate by acquisition, but also include organizations that were not previously considered technology-dependent; these companies are being driven by consumers’ growing digitization demands to purchase technology companies.
Beyond consumer drivers, economic reasons for the current high rate of M&As include the fact that the Dow, S&P and NASDAQ are performing at or near historic highs. In addition, high-valuation public IPOs encourage valuation inflation in the private M&A market.
While achieving a high valuation is desired, technology company leaders seeking investment may decide that focusing on building a strong business, rather than trying to position themselves directly for a merger or acquisition, is a reasonable strategy. Investors are interested in companies that can provide long-term, incremental revenue growth, so CEOs should set their sights on creating a successful, sustainable business. There are measures companies can take to position themselves for sustainable success. Foremost is to instill a focus on long-lasting growth and profitability rather than short-term liquidity. Such a strategy will inevitably make a company more attractive to investors.
- Alex Castelli is a CohnReznick LLP Partner and the Leader of the Firm’s Technology Industry Practice. Alex has nearly 25 years of experience managing the audit, accounting, and reporting issues of entrepreneurial companies. Contact Alex at firstname.lastname@example.org. Follow CohnReznick’s Technology Practice on Twitter @CR_TechInd.