Navigating the transaction environment during COVID-19

Chris Lewis

Whilst the world around us has become unusually uncertain in the last few months, transactions in the European technology sector have continued to be completed and often at strong valuations. Business leaders have one eye on the immediate impact of the pandemic, and one eye tentatively looking to the future. Consequently, transactions remain high on the agenda as a way of reshaping business for future growth.

Our data shows 404 transactions completed with European targets in H1 2020 with a largely even split between Q1 and Q2. This represents just a 3% decline in deal numbers compared to H1 2019 and an 8% increase on deals in H2 2019.

Public markets valuations have bounced back rapidly with the NASDAQ Composite trading above 10,000 for the first time. NASDAQ has returned to its pre-crash level within just 111 days – a rapid rebound compared to the Global Financial Crisis where the index took almost two years to revert to 2008 levels. Investors are clearly pricing in a V-shaped recovery.

Similarly, the CG Results International SaaS index is currently showing a median EV multiple of 11x current year revenue for listed businesses; this compared to an average of 6.3x since we started tracking it -six years ago.

So the data, and our own experience of the market, point to strong businesses being able to complete transactions at attractive valuations. For more in-depth analysis, read our latest piece on Software Valuations in the Age of COVID-19.

Private equity and Transatlantic buyers continue to lead the charge

It’s hard to generalise as we see buyers of all types actively pursuing attractive businesses, but two key constituencies stand out for their lock-down deal-making activities:

Private Equity: one of the biggest macro-themes in technology sector M&A in the last decade has been the growth in private equity as an asset-class acquirer of tech sector businesses; both as new platform investments and as bolt-on acquisitions to existing platforms. This theme has continued unabated in the first half of 2020, with PE deals (platform and add-on) up 17% compared to H1 2019 and representing one-third of total transactions.

As the private equity community grows its overall ownership of the sector, so add-on deals for existing platforms are becoming more plentiful. COVID-19 has accelerated this trend as funds look to deploy capital behind already trusted management teams in an era of higher uncertainty; in Q2 2020 add-ons to existing platforms made up two-thirds of all PE-funded transactions in European technology, and one-quarter of all deals completed in the sector. HelpSystems’ (TA-Associates backed) acquisition of Boldon James, Kerridge’s (AKKR backed) purchase of Infomat, and Horizon’s TotalMobile buying both Lone Worker Solutions and GRS, are good recent examples.

US technology majors: in 2020, US acquirers have continued to make up more than 30% of all buyers of European technology businesses. With no balance sheet constraints, the very largest US technology vendors have continued to shop in Europe for talent, product and market entry. For example, Microsoft has acquired both Softomotive (RPA) and Metaswitch (SDN) since UK lock-down commenced. Accenture has acquired eight businesses across Europe so far this year (a run-rate record) with three deals completed in the second quarter. Similarly, Alphabet, Facebook, Apple and Oracle have all made acquisitions in Europe during 2020, and ServiceNow made its first European acquisition in seven years by buying facilities management SaaS vendor, App4Mation.

Based on our recent experience: lessons for success

There is a clear set of shared characteristics amongst businesses that are able, in the current environment, to sell or find investment at strong valuations:

  • Resilience to the current situation – shown by limited churn, recurring revenue streams, a mission-critical offering, which is sold into a customer base not especially adversely impacted by the crisis
  • Ability to grow through upsell into existing customers – who are that much easier to reach with the current logistical challenges of completing enterprise sales
  • Benefitting from tailwinds – short-term and/or medium-term from the new ways of consumption and working driven by COVID-19

If your business has these characteristics, you will likely have attractive options for financing, de-risking or exit. If not, best to hunker down and see out the next 12-18 months before considering your options from a position of strength.

From our recent experience of successful M&A and fundraising projects, we draw the following lessons:

  • Crisply describe the positives in your business. In the current environment, it’s easy to focus on what isn’t going wrong – instead focus on what is going right. Ensure you are clear and vocal about new business momentum, signs of market recovery, and new growth and value creation opportunities;
  • Talk about how COVID-19 has impacted your business, and how you expect the health crisis and ensuing economic challenges to impact financial performance going forwards. Demonstrate both customer resilience and run scenarios for how the future will play out, backed by differing views on pipeline conversion;
  • Be well prepared. Now more than ever, data to support your story is key, and the ability to move fast is of huge benefit. Time spent upfront is never wasted; and
  • Hold your nerve. Valuations have not dropped for COVID-resilient businesses, and we saw in the global financial crisis that valuations for the whole technology market bounced back within 12-18 months. Now is not the time to sell cheap.

We are attending the Megabuyte CEO Summit (virtual conference) in October 2020 and hosting a session on Driving Growth and Delivering Value in ICT & Digital Services Companies.