This article is the latest in a series of three blogs in response to the drastically changed economic conditions since March (due to the war in Ukraine and rising inflation). What is it like to market a technology company now?
In part 1 (March) I wrote that selling a tech company possibly more difficult would go in 2022 — but that some cooling in the market for tech mergers and acquisitions isn't necessarily unhealthy. In 2021, valuations had risen very high. If valuations remain too high for too long, it deters buyers.
No hard landing
In part 2 (May) I expressed the expectation that there no hard landing comes into our market. Such a hard landing, in which suddenly almost no deals are closed, was seen, for example, after the credit crisis erupted in 2008, or in the dot-com crisis from 2000.
Now the situation is clearly different. Both investment funds and strategic parties still have a lot of money available for acquisitions. In addition, the digitization trend in the business world means that (many) tech companies continue to grow rapidly (which makes them interesting acquisition prey) and also that more traditional parties sometimes have to go on the acquisition path to keep up with digitization. This article from June 20 in the Financial Times – confirms that picture.
If there is no hard landing, but it does become more difficult to real Dream Exit to be realized – what does that look like in concrete terms? In this third article I will discuss the practice of tech M&A (mergers and acquisitions), in 2022.
More companies for sale
It is clear: more companies are coming up for sale. Director Peter Rikhof of the platform for business acquisitions Brookz let recently in Het Financieele Dagblad know that 30 new companies are offered on his platform every week, 'an unprecedented number'. Brookz is for all types of companies, so those 30 aren't all technology companies. But a substantial part does.
The increase in supply is well explained. Firstly, there is the multi-year trend of aging. A large part of the current generations are slowly getting older and want to stop at some point.
Moreover, the past few years have been peak years for many companies – certainly also for technology companies: software suppliers, hardware manufacturers, managed services providers and so on.
A great opportunity for a Dream Exit
Now that the numbers look so good, sellers see a great opportunity to realize a Dream Exit (and rightly so). An additional reason to want to realize a sale now is because they are often somewhat uncertain about the future. For most tech companies it is business as usual, but will it last? Economists have been talking about a slowdown in economic growth for several months. Could that also affect tech companies?
Then there is the buyer's perspective. As I envisioned in the first blog, that buyer is becoming more cautious. The buyer has certainly not disappeared, so now is the time for a Dream Exit. But the buyer also wonders more than before whether a takeover candidate can continue the healthy profit and growth figures.
Money is getting more expensive
In addition, money becomes more expensive. That is a factor that should not be underestimated. As I wrote, there is plenty of money available in the takeover funds of many companies. But most acquisitions are at least partly financed with a loan. And those interest rates are rising. As money becomes more expensive to borrow, potential buyers want to take less risk with that money.
In short, the seller's market is becoming more of a buyer's market again. What can a seller do to realize a Dream Exit after all? No Monkey Business (sometime ago) compiled a list with 16 points of attention for companies: the No Monkey Business Top-16 for Value Creation. Crisis or no crisis, for those who score high on all 16 points, a Dream Exit is within reach.
What's important now
In the circumstances we find ourselves in now, there are two points that are extra important for an interested party.
One: growth prospects
Growth prospects are always important when valuing a tech company. After all, a buyer wants to earn back his investment as quickly as possible. The faster a business grows, the faster a buyer can recoup the investment. Growth figures of the last two or three years are important. Also interesting are – if available – growth figures from a previous crisis period. But especially important are detailed and substantiated growth prospects.
We published a more extensive article about the importance of good growth prospects here.
Growth is one thing, profitability is another. Growth is preferred over profitability for many tech companies, but in times of crisis, buyers are keenly looking at at least the ability of acquisition candidates to be profitable. By that I mean: if marketing efforts and other non-fixed costs are scaled back, is there a structurally sound and profitable company?
What mainly plays a role here is the fact that borrowing money is becoming more expensive. If you as a buyer have to take out a loan for a purchase, you do not want to run the risk that it will take you too long to repay that loan. Structurally unprofitable companies are really out of favor for now.
We published a more extensive article about the importance of profitability here.