As we predicted in Q1, deal activity has continued to increase in Q2 and the technology market remains very strong for M&A and public trading and optimism for future growth remains very healthy across all the technology sectors we track.
M&A continues to be driven by strong levels of investment by private equity (directly and through portfolio companies) and large strategic corporates making sizeable, transformational acquisitions to step up their portfolios. We expect to see this continue in private markets for the remainder of 2021.
The momentum in the IPO market indicates a positive step in the global economic recovery, and Pandemic-resilient subsectors with proven sustainable growth trajectories continue to be the front runners.
In our Global Technology Market Review, we analyse valuations, M&A activity and broader trends in the key technology markets of enterprise software, technology services and cybersecurity. We hope that you enjoy this report and look forward to discussing the data and underlying themes with you. If you are contemplating fundraising, exit or growth through acquisitions, please do get in touch.
Click to read Global Technology Market Review: Q2 2021_newCONTENTS
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Technology Services Perspective
CyberScope
Enterprise Stack
The last twelve months have been a time of extraordinary activity in the commercialisation sector – the COVID-19 pandemic saw medcomms groups play a crucial part in keeping pharma companies connected with patients and healthcare professionals, and dealmaking was frenetic on both sides of the Atlantic, for smaller agencies as well as for emerging ‘CCOs’.
As we move further into 2021 and further away from the worst effects of the pandemic, attention is turning to what the next phase in the sector’s evolution may bring. Are there visible risks to the high growth that the sector has recently enjoyed? Will we see continued consolidation and high valuations? Will the growth of digital channels stall as restrictions ease and events shift from virtual to in-person?
Watch this 1-hour webinar on-demand, as we interview an expert panel including Neil Jones, COO at Huntsworth; Dr Jill Harrison, Executive Director at Bioscript Group and Martin Ellis, Founder of Medicom Group and former Non-Executive Chair at Havas, who have all kindly agreed to share their insights on the next chapter for the sector.
SPEAKERS
Neil Jones, Chief Operating Officer, Huntsworth
Neil is currently Chief Operating Officer of Huntsworth, an international healthcare and communications group (which was taken private by PE house CD&R in May 2020), a position he moved to in October 2019, having previously held the position of Chief Financial Officer at Huntsworth since February 2016. He is also CEO of Huntworth Communications – the Group’s Public relations and Public affairs business. Neil’s role at Huntsworth includes oversight of the Group’s M&A function, with Huntsworth having completed 10 acquisitions in the healthcare sector in the past 4 years, the largest being the acquisition of Nucleus Global in November 2020.
Neil has held senior financial positions for over 20 years, the majority of which have been with public companies in the United Kingdom. Most recently he was CFO of ITE Group plc (now HYVE plc), a FTSE listed international organiser of exhibitions and conferences. Prior to that he was Group Finance Director of Tarsus Group plc, another international trade exhibition organiser. Neil is also a Non-Executive Director of Tremor International, an AIM listed Ad-Tech company. Neil is a member of the Institute of Chartered Accountants in England & Wales, qualifying with PWC in 1990.
Jill Harrison, Executive Director, BioScript Group
Dr Jill Harrison first began her career as a medical writer in 2000 and for the past decade, has held executive roles in medical communications agencies. Jill’s most recent role has been at BioScript Group Limited, an international provider of medical communications and regulatory writing services for pharmaceutical companies. During her time as CEO, Jill oversaw the transformation of the business from a small start-up to a medium-size enterprise operating a team of over 100 employees across three territories.
In early 2021, BioScript secured private equity investment from Sovereign Capital to support ambitious plans for growth which will see the expansion of the current service offering and greater geographic reach to further enhance the client experience. Having her own experience of balancing her career with busy family life and four children, Jill has always put people at the heart and centre of the business and is passionate about creating a healthy and happy and diverse workplace in which employees can flourish.
Martin Ellis, Founder of Medicom Group and former Non-Executive Chair at Havas
Martin started his career in the pharmaceutical industry, working in sales and marketing roles for a number of leading companies. In 1992 he moved to the agency world, initially with Burston Marsteller before moving to Cohn & Wolfe to start a healthcare practice.
Founding Medicom Group in 2003 he rapidly grew his own agency into one of the leading UK agencies before selling a percentage to HAVAS some 6 years later. Rapid growth as part of the global group saw Medicom become one of the leading European healthcare businesses with the agency recognised with numerous industry awards.
HAVAS acquired the remaining percentage of the business in 2016, with Martin remaining as the Non-Executive Chairman of HAVAS global and working primarily in acquisitions for the group.
Now fully retired from HAVAS Martin spends the majority of his time in SW France but continues to invest and advise start-ups.
Deal valuations have continued to drive upwards as the technology market remains very strong for M&A and public trading and optimism for future growth remains very healthy across all the tech sectors we track.
M&A continues to be driven by strong levels of investment by private equity (directly and through portfolio companies) and large strategic corporates making sizeable, transformational acquisitions to step up their portfolios. Pandemic-resilient subsectors with proven sustainable growth trajectories continued to fetch the highest valuations. We expect this trend to continue with increasing deal activity throughout 2021.
Certainly at CG Results, Q1 was a dynamic quarter, with the business completing a number of high valuation transactions including ZigZag’s acquisition by Global Blue, BlueVenn’s acquisition by Upland Software and Tenzing’s investment in Metacompliance.
Click to read Global Technology Market Review: Q1 2021In our Global Technology Market Review, we analyse valuations, M&A activity and broader trends in the key technology markets of enterprise software, technology services and cybersecurity. We hope that you enjoy this report and look forward to discussing the data and underlying themes with you. If you are contemplating fundraising, exit or growth through acquisitions, please do get in touch.
M&A and valuations in the CRO sector – March 2021
The level of impact that Covid-19 has had on M&A activity is comparable to that of the Great Financial Crisis, however, the rebound has been notably stronger. In the last year c.70 deals completed with a significant contribution from the second half of the year.
There was a meaningful drop-in activity in Q2 which was driven by the need for buyers to focus on internal priorities in the wake of the pandemic and were further challenged by travel restrictions, impeding deal processes.
This trend reversed in Q3 as buyers were in a better position to assess the impact that the pandemic had on target companies and they became more accustomed to diligence businesses virtually.
2021 has gotten off to a strong start, with 23 deals completed by the first week of March, signalling a likely strong Q1 performance.
Click to read CRO Sector Update – March 2021 _newTo read an in-depth analysis of M&A activity and valuations in the sector over recent years, read our white paper here.
Keith Hunt to retire; Julie Langley appointed as successor; Mark Williams promoted to Partner.
After 16 years of unwavering commitment to the firm and its clients, Keith Hunt will retire as Managing Partner from CG Results International with effect from 1st May.
Julie Langley, who has been a partner at CG Results for eight years, will succeed Keith as Managing Partner. In further strengthening the senior team, we are pleased to announce the promotion and appointment of Mark Williams to Partner.
Keith commented: “I have thoroughly enjoyed leading CG Results as Managing Partner and watching the business continue to grow, develop and prosper. I feel immensely proud to have worked as part of such a great team and with so many fantastic clients. We have been planning my retirement for a long time and so the transition will be seamless, and I wish Julie and all at CG Results continued success”.
Julie added: “I am thrilled to be offered the opportunity to lead CG Results as Managing Partner and in so doing would like to acknowledge the significant contribution and leadership that Keith has provided in his many years at CG Results. I am also delighted to share the announcement of Mark’s promotion to Partner. Mark has been with CG Results for eight years and has been instrumental in building the successful technology practice that we have today.”
This announcement comes on the back of a very strong 2020 and Q1 2021 for the firm. Despite the challenges created by the global pandemic, CGD Results has advised on 28 deals across the technology, marketing services and healthcare sectors since January last year, including 6 deals in 2021 year-to-date.
We are looking forward to a return to more normal working practices as the vaccination program rolls out, and hope we will be able to see many of you in person as the year progresses.
Covid certainly had a sudden and material impact on M&A in the sector. After a strong Q1 where deal activity was ahead of 2019, deal volumes halved in Q2 2020. We did however see a positive resurgence in Q3 and Q4, with deal volumes back up to about 70% of 2019 levels. Despite deal volumes being down, we continue to see multiples at pre-Covid levels for strongly performing businesses in the space. Demand has been particularly high for capabilities including data & analytics consultancy, performance marketing, Amazon and ecommerce, digital transformation and content creation at scale.
Click to read Global Marketing Sector Review – FY 2020Amongst the public companies, the large networks have recovered since the downturn in March but are for the most part still trading below their pre-Covid levels. There are certain outliers amongst the mid-caps, notably S4 Capital which has decoupled its performance from the broader sector. The consultancies have also recovered and as a group are trading ahead of where they were pre-Covid.
The pace of change in the industry is only accelerating; automation, data privacy and the continued expansion of the major platforms (Amazon, Facebook, Google and Apple) are creating challenges for brands and opportunities for digital agencies. As a result, and despite uncertainty and challenges in certain areas of the market, we are confident that we will continue to see strong levels of buyer and investor interest in the sector through 2021.
Deal activity and valuations in the technology sector were robust in Q4, counteracting the short, sharp decline in the first six months of the year and making 2020 a stronger year than expected across all the tech sectors we track. Deal activity has been driven by publicly listed strategic buyers, who continue to look to M&A to drive growth, and by continued strong levels of investment by private equity (directly and through portfolio companies). We expect this impressive level of deal activity to continue into 2021 increasing competition for high-value businesses.
Click to read Global Technology Market Review: FY 2020In our Global Technology Market Review, we analyse valuations, M&A activity and broader trends in the key technology markets of enterprise software, technology services and cybersecurity. We hope that you enjoy this report and look forward to discussing the data and underlying themes with you. If you are contemplating fundraising, exit or growth through acquisitions, please do get in touch.
In the fall of 2017, CG Results Healthcare issued a report on how, after having transformed the way we shop, entertain ourselves, and even socially interact with one another, Alphabet (Google), Amazon, and Apple were making big bets on bringing transformative technology to another aspect of our lives — our health. Back then, we observed that these ‘Titans’ were quickly setting a high standard for investments in health technology, positioning themselves as disruptors to the healthcare industry’s incumbents.
Fast forward to the present day, we have been contending with a pandemic for the better part of the past year and into 2021, and have witnessed disparate, if not contradictory healthcare policy-making at the Federal, state and municipal levels in the United States. In many respects, Big Tech’s existing healthcare investments have had a positive impact on how the average person contends with Covid-19 (e.g. Verily, a Google company, partnering with Rite-Aid to offer free Covid-19 testing services through Project Baseline).
The present report offers CG Results Healthcare’s analysis on the continued expansion of Big Tech in healthcare. We review how Facebook, Apple, Amazon, and Google are now positioned as they compete to capture a bigger slice of the $11.9 trillion global healthcare market. We also venture into pointing to the direction that their investment and M&A activities may take as these four Titans fill up “white space on their healthcare stack”.
What to track to enhance results, value and buyer appetite
Key Performance Indicators (KPIs) are an important and well-trodden method of managing a business; making sure those elements of your business which drive performance are consistently tracked will inevitably result in improved outcomes. With Technology Services businesses, KPIs are also a vital tool for those on the outside to understand the essence of a business. In particular, when there is a variety of services on offer, a well-structured set of KPIs will give a very clear sense of where and how the business is offering value to its customers. Effectively answering the seemingly basic question we always start by asking our clients: “what does the business actually do?”
We have helped to maximise value of, and attract buyers and investors for, many businesses across the whole spectrum of Technology Services. What we consistently hear from our clients is that they wish they had prepared and tracked the right KPIs much earlier.
There is a seemingly endless list of performance indicators that could be tracked. Some will be more applicable to your business model than others, and some are certainly more ‘key’ than others! In the table below are some of most broadly applicable KPIs, along with relevant benchmarks of ‘what good looks like’ from our experience of both Project Services and Managed Services businesses.
These KPIs prove out four key areas: the defensibility of your revenue streams via Visibility; the benefits and capability of the business to grow rapidly in Scalability; the right of the business to thrive (and command a premium valuation) in Differentiation; and ultimately the goal for all businesses in the space: cash generation in Return.
Visibility
For project services, it will generally be accepted that the majority of revenue will not be recurring in nature. That said, being able to prove a route to managed services through an end-to-end service offering (consultancy, delivery, support) with a portion of revenue that is recurring (30%+) will be seen very favourably. Of course, the expectations will be much higher for a managed services provider (80%+).
What really matters for project services business is the portion of revenue that comes from your base (repeat customers). If you can prove that this is 80%+ and in absolute terms growing consistently every year, you are telling prospective buyers that you are a highly relevant and embedded strategic partner to your clients, increasing wallet share every year, and that long-term revenue visibility is very strong. This underpinning of forecast growth might even enable you to get buyers looking at run-rate and forward-looking numbers when valuing your business.
A diversified client portfolio is important as well with too much dependency on one or few clients seen as risky. Therefore, don’t just rely on your base, and make sure you focus enough time and energy on winning new business.
Scalability
It goes without saying that most buyers will have certain size thresholds, below which they will not consider your business big enough to move the needle – as a rule of thumb this is typically £10m+ revenue and 100+ people but there are of course always exceptions. The reality is that exactly how big and how much expected growth will very much depend on the stage of maturity of your particular service proposition, and that is why specific metrics on this have been excluded from the table above. Nevertheless, it will always be true that the more growth the better with this a strong indicator of market demand and the quality of your offering.
Employee retention will always be a key focus area and even more pronounced in technology services – we have seen deals structured in a certain way because of perceived risks of employee churn. 85%+ retention will be seen as very positive, indicating a strong culture, that you are hiring the right people and that there is emphasis on training, development and career progression – all key requirements to scale! If you have a retention rate less than 80% you will need to prove that some of this churn was wanted!
A truly scalable business will typically be targeting utilisation of around 85% (based on available hours so excluding holiday etc.). Much lower than this, your margins and profitability will quickly start to look unattractive. Much higher you are leaving no room for research and innovation, key requirements in making sure that your services business continues to stay ahead of the competition, and you will no doubt quickly start to experience more employee churn as well.
Differentation
Proving differentiation and your right to thrive in your market will always be a hurdle for most buyers with commoditisation seen as a race to the bottom. For technology services businesses, the financial metrics, and in particular the gross margin, will go some way to proving this very point. A gross margin of 50%+ will quickly indicate a business that is able to command high day rates and premium pricing. Less might suggest otherwise.
In people-based businesses, buyers are going to want to know how technical the team is and how long they are likely to stick around. Often what will be driving buyer decisions is the need for scarce talent in the “right” technical skill set. Therefore, being able to demonstrate the number of data scientists, AI experts, highly sought-after software accreditations etc. will be important and will help to prove differentiation – if you don’t have this data to hand, it’s worth starting to collect it.
Return
Profitability is always going to be important – most technology services trade buyers are valued off EBITDA and tend to have margins in the mid-teens so anything less than this would be dilutive. If your margins are less than 15%, you will need to explain why (invested ahead of the curve, compressed utilisation rate etc.) and what your pathway to greater profitability is.
The Golden Rule
Finally, make sure you prepare your information in advance. Develop a system to track your KPIs and be disciplined in producing and reviewing them, automating reporting where possible. These metrics should become part of your monthly operations meetings and board meetings, and they should evolve over time. If you succeed in doing this, it will go a long way to helping you achieve the best possible value and finding the best possible home for your technology services business.