Tech execs resume add-on M&A, focus on quality, AI: Stifel survey

The global quarantine will become a new benchmark in time – just like the Global Financial Crisis in 2008 – for assessing the resilience of business models, the bankers said.

Tech investors and entrepreneurs remain optimistic about the economic recovery, with many sponsors prioritizing bolt-on acquisitions in the near term, according to a survey compiled by Stifel’s Global Technology Group.

The investment bank’s technology unit conducted a second online survey of 57 global technology executives and entrepreneurs between July 8 and July 16. Its first survey, encompassing 300 participants, took place in April amid the escalation of the pandemic.

Similar to investor mindsets three months earlier, most respondents are projecting a U-shaped recession and expect little to no churn in securing recurring revenues for their businesses. According to the survey, only 7 percent foresee a sharp, prolonged “L-shaped” recovery, a worst-case economic scenario.

Some key findings:

  • Most respondents expect M&A to heat up, indicating they are planning to pursue add-on acquisitions in the near term (63 percent)
  • Most respondents report little to no customer churn in recurring revenues (70 percent)
  • Most respondents say their investors and debt providers have been very supportive (70 percent); and some raised capital in the last quarter (30 percent)

The expected pickup in M&A activity is a shift for private equity participants, which a few months back were focusing inward on their portfolios, Cole Bader, co-head of Stifel Global Technology Group, said at a recent virtual conference.

“[The] private equity community was distracted by their portfolios, having to spend time figuring out what are the issues, bolstering down the stronger companies, and deciding what to do with some of their weaker ones – and that just took them out of the game for a while,” Bader said.

For both platform opportunities and add-ons, the banker said, “we are very much seeing private equity coming back.”

According to Bader, covid-19 has accelerated the underlying trend of digital transformation in many ways. The trend plays well into the value proposition of most technology companies and has fueled the sector’s resiliency, he said.

Stifel bankers expect artificial intelligence (AI) to emerge as a crucial factor when it comes to assigning value for software companies as the economy recovers.

According to Brad Topchik, a managing director on the software and tech-enabled services teams at Stifel, there will be more focus on AI capabilities as a method of improving products.

“Whether it’s a security product, a network management product, an application development product – one of the very first questions we get asked with every M&A assignment is how the company is using AI to extend its product capabilities,” Topchik said.

There will also be a flight to quality as many investors pay greater attention to businesses that showed resilience through the downturn, said Patrick Seely, co-head of the Global Technology Group at Stifel.

At the same time, sponsors will have less forgiveness for companies that don’t show a straight path to profitability, he said.

“There is greater enthusiasm for taking on businesses that have mature business models, with predictability of revenue and profitability,” Seely said. “In those markets where there are flight-to-quality businesses, prices will continue to be very strong.”

The global quarantine will become a new benchmark in time – just like the Global Financial Crisis in 2008 – for assessing the resilience of business models, the bankers said.

“With Q2 just closing, we’ve seen a lot of private equity firms and strategics waiting to see how you’ve performed in a full quarter through covid,” said Bryan Dow, a managing director at Stifel’s Electronics, Applied & Industrial Technology team.

“The change coming out of covid is that people will really be focused on what you did during this time period, what actions were taken, and, once again, how you’ve proven your resilience.”

Action Item: See Stifel’s full report here.