VIEW FROM THE TOP: HOW DO YOU SUCCEED IN TECHNOLOGY M&A?
Even to the most avowed Luddite, it is clear that our lives are becoming ever-increasingly influenced by technology. Not a day goes by where we are not governed by our smart-phones or tablets, and more specifically by the vast array of applications available on these devices. The overwhelming significance of technology has similarly been felt in the world of investment banking, with, according to BCG’s 2017 Mergers & Acquisitions report, High-Tech deals representing almost 30% of the total $2.5 trillion of completed M&A transactions in 2016. In addition, technology is hardly just for tech companies anymore, as nearly every industry has been affected by digital and mobile technologies. So, in assessing this ever-evolving sector, what are the principal trends in tech M&A, and how is the industry transforming? Further to these questions, what does it take to succeed in becoming an advisor to the sector?
To address some of these questions, I joined a renowned TMT banker and CEO of a leading TMT boutique based in the West-End.
What would you say is one of the most pronounced changes that you have seen affecting the sector?
“The main trend has been to understand social media and its impact on digital media. We have had to really evolve to understand how digital media works and understand what the value drivers are. It’s not just a question of number of users, but how those users behave and how much they are worth. Are they real users or are they bots? It’s a new area of exploration, and the reason why I refer to social media is because its impact has meant the value of these digital media assets are not necessarily even just in the app themselves. For example, you might read some content that has been posted on Facebook, or on Instagram, and so you might never actually go to the underlying app. When you are trying to determine what is valuable content you need to understand how it’s disseminated by social media and who is watching it, what tribes are following it, and what they’re worth”.
With value difficult to determine and ever-increasing multiples being paid for acquisitions, where are the best opportunities?
“The highest multiples are invariably found in the most sought-after areas or ‘fashionable’ technologies, at any given point in time. Therefore, the lower multiples, and thus perhaps the more attractive opportunities, are in trends or concepts that are currently less in fashion, but have strong future potential. I would also say that where the multiples are lower is often with more traditional technologies; this is currently true in some satellite communications for example. If you look at the multiples in that sector, they are depressed for several reasons including the increasing roll-out of fibre and other means of access to broadband and data; there is a question as to whether satellite communication can really compete with that. However, with demand for data ever-increasing, will demand for this technology really phase out? Another example would be in technology exposed to the oil & gas sector. That is a cyclical business and therefore value may return in-line with a recovery in the oil and gas industry.”
With the sector becoming ever more complex, what are the key attributes needed to be successful as a technology M&A banker?
“I’m going to say two contradictory things in answer to that question. First of all, as this is an especially complex sector, there is a required base-level knowledge of the idiosyncrasies of technology business models, in order to understand effectively the rationale behind transactions and valuations. My other observation, which is contradictory in some ways, is that the technology sector is now so all-encompassing that there is no way you can possibly be an expert in all of it, or even just a reasonable part of it. There are so many sub-sectors, ranging from semiconductors to software, and all the more so now because most sectors contain a growing ‘technology’ element. So, the way in which I reconcile these two points is to say that you develop a view of certain business models. One must get familiar with certain business models, whether it’s monetising users on the internet, advertising, subscriber models or traditional paying models, or whether its monetising users in a completely different sort of context in terms of selling software, products and services. You need to develop an analytical view of certain business models, and then you can appreciate how they apply broadly on various verticals within technology. I think that’s not obviously the only criteria, or maybe even the key criteria to be successful in technology M&A, but I think it’s a precondition to be able to do it. When we recruit, we look at people and ask, “How would you model business X?”, and even if they have never looked at this type of business before, we seek to understand whether they can approach the question with a well-thought through and structured mind-set. This discipline is key as the ‘noise’ created around a business or in-demand technology can often be the reason a fair valuation is ignored.”
With your previous comments in mind, what do you look for in a potential hire?
“We look for whether potential recruits can evolve into being one of the leaders in our business. This is an industry for which you need to have a strong passion, and if someone shows a true personal interest then it really is evident. Also, we are a challenger firm, and we are trying to beat very large and established players, so we must be innovative and creative and try to be as different as possible. We need to hire people who have the courage to think about unconventional answers”.
As the definition of the technology industry grows blurrier, and its influence is felt further and further afield, and ever more powerfully, it is becoming even more difficult to operate as a true specialist across the entirety of this sector. You need to determine in which sub-sector your passion lies, and then immerse yourself in the underlying businesses. You can then begin to develop techniques that ensure you become adept at applying the most accurate valuations to said companies, and understanding what is required for them to succeed or fail.