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M&A in Tech Industry – Emerging trends in a post pandemic world

By Jyothirmoy Bhattacharjee, Head of Technology, Consark Advisory Services LLP

If Charles Dickens had a chance to write about the state of business in current times, he would have plagiarised his own oft-abused cliché- “It is the best of times, and it is the worst of times”.

Such is the entropy in the tech industry, that talking about what to expect in a post-pandemic world, would be crystal gazing at its most speculative. However, current times present a clear opportunity to those who want to take calculated bets to surge ahead or create sustainable differentiation.

Opportunistic M&A hotspots

Last year witnessed a good run for a large set of emerging global tech companies. With around 400 such companies emerging as unicorns between 2020 and 2021, IT services companies can choose to ignore them at their own peril. To serve this new breed of clients, the focus will shift from scale and continuity of revenue. Instead, the business heads will be keen to demonstrate full-stack development and devops capabilities. Thus, companies with expertise in product development, design, and cloud enablement will be highly coveted by the acquirers.

Going beyond traditional adjacencies

Strife and plague make strange bedfellows and have served as the ingredients for many eclectic brews. Thus we can expect to see non-intuitive convergences, creating new business models.

A use-case in enterprise technology arises from the hyper decentralisation of workspace. There we may see a strong case for a confluence of infrastructure management with productivity, collaboration and BPM. Given that these have been historically addressed by different classes of software products, we can expect many deals trying to replicate the magic of Microsoft Teams. With Slack’s acquisition, Salesforce aims to transform itself into an enterprise software for a “work from anywhere” world.

Let’s take this further to your home workspace.  You probably are still struggling with the controls of your Teams or Zoom calls. In the very next room, your child is probably exchanging Roblox scripts with her friends over Discord. The writing is on the wall that we have a growing cohort of homebodies across generations. With gaming becoming mainstream, it will rapidly be used for hiring, commerce and education. Models would emerge that use gaming as the core proposition combined with social and Edtech features. Don’t be surprised if you see the likes of Byjus and Mojang joining hands. The Edtech companies would find gaming an invaluable tool to keep the users engaged and collaborative.

Global Play & Vertical Resilience

Certain sectors would no longer be limited to a local audience. Notable here would be media and Edtech, where a flurry of inbound and outbound transactions can be expected.

For e-commerce and food-tech, securing the supply chain will be a crucial theme. While their ability to manage the cycle of demand-to-fulfillment is evident, the supply side has to catch up with demand tailwinds. These can be expected to develop in-house brands and have deeper integration with supply chain enablers. Companies like Thrasio and Mensa’s approach to creating an “aggregator of brands” is an indicator of the same.

The $ 64000 question

So that brings us to the question of valuation. Would the conventional wisdom of buying Chippendales and family silver at throwaway prices during troubled times hold true?  We don’t see that happening this time. The multiples at which the deals are being struck, have remained steady.  Underlying financial metrics and those related to customer acquisition and lifetime value have generally soared amongst tech companies. Instead it’s the promptness of the two parties and ease of deal structuring, which would be pivotal towards a transaction closure. The buyer would not spend an inordinately long time to acquire an asset and lose the edge of an early mover. The seller as well would rather focus on finding more agile partners.

No doubt the pandemic has brought financial consequences of Dickensian proportions to many; we still have great expectations from the tech sector to keep the engine of growth well fuelled.

(The author is Head of Technology, Consark Advisory Services LLP. Consark is a boutique advisory services firm providing Financial, Risk & Assurance and Tax advisory services. The author can be contacted on jyothirmoyb@consark.com. Views expressed in this article are personal.)

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