08 Jan 2021
It’s been as great few years for Tech M&A. In the past four years 800-900 deals have been announced per year, 2019 was a vintage year. One of the drivers behind the wave of deals has been the growth in PE backed Buy-and-Build deals. Brian Parker, Co-founder and Head of M&A at ICON Corporate Finance, looks at some of the main reasons for this and how PE backed acquirers differ from traditional trade acquirors.
PE-backed M&A deals have increased significantly, having doubled in the past four years. They accounted for 24% of all UK Tech M&A deals last year. In particular, we are seeing some pretty aggressive buyers emerging. For example, Inflexion has completed 20 buy-and-build acquisitions this year out of a portfolio of 48 and LDC has completed 45 acquisitions in the past 24 months. That’s a lot of deals. In fact, the five most active Tech acquirers in UK are all PE backed. ClearCourse, backed by US based Aquiline Capital Partners is the most acquisitive having completed 20 acquisitions already and they didn’t even exist two years ago. It is pretty clear that the most aggressive acquirers – who are adopting a buy-and-build strategy - are PE backed.
Zero interest rates for the past 10 years has meant that there’s a lot of cheap money out there looking for a home. So, competition for larger deals has been intense, driving up valuations.
A great many PE investors have moved down the food chain. Rather than trying to deploy £100m on one deal, they are increasingly having to buy five for £20m. Rather than take on more mature businesses, PE has gone down the route of buy-and-build.
The Technology sector in particular is attractive for three main reasons:
· First, annual licensing model means tech companies now have high quality recurrent income and cashflow which is much easier to leverage against.
· Second, tech companies tend to be very scalable, more so than many other businesses, so there are considerable economies of scale.
· Third, growth is also really important and with the acceleration of digitalisation as a result of COVID, has made the Tech sector even more attractive.
Why are PE houses backing buy-and-build?
Buy-and-build allows PE houses to deploy their capital easier and quicker, and there are some pretty big war chests out there looking to make up time, despite the interruptions of Covid-19.
There are three main attractions to buy-and-build:
· Smaller businesses tend to be cheaper in terms of revenue and profit, so PE funds can take a turn on their valuation by amalgamating a number together; the sum of the parts is greater in terms of valuation.
· By making acquisitions, it clearly accelerates growth and speeds up the entire process. With PE holding periods on the increase, buy-and-build is helping PEs to get their money back sooner and boost the return on capital to investors.
· PE houses are also well aware that by buying a number of businesses in the same sector, you get greater synergies, than you would if you just acquired larger platform businesses. By integrating smaller tech companies, you can get both cost synergies from overheads and cross-selling opportunities too.
What is the difference between selling to trade or a PE-backed acquirer? What should you consider?
10 years ago, owner managers would have almost always stayed in the PE backed business for a work-out period. That’s no longer always the case with buy-and-build, as the platform companies often have experienced management capable of running the enlarged business.
As an example, we saw this flexible approach adopted by US-based Aptean when they acquired logistics and last-mile transportation management software provider Paragon, who we advised. In this case the management stayed for the handover, but Aptean was happy for them to exit thereafter. Similarly, in selling Silverbear to ClearCourse, the founder of Silverbear left after a one-year handover. There is clearly a flexibility in approach.
Other factors are:
PE-backed businesses tend to make decisions faster than trade acquirers. As well as having M&A specialists on the team devoted to the process, they tend to be very well prepared, know what they want and value their time enormously. By contrast, some larger trade acquirers can have slightly clunkier decision making processes, often having investment committees, and that can slow things down.
There are other factors to consider. PE backed businesses tend to have better flexibility in terms of shaping a deal than a trade acquirer. As an example, earlier this year we had several offers for a unified comms client. One PE house was particularly keen to do the deal, so they introduced an innovative earn-out option in the offer, based on the number of software subscribers added, rather than measuring revenues or EBIT. That turned heads.
Culture can be a big thing, particularly if management are staying. PE backed businesses tend to be younger, nimbler, evolving and less corporate; much more aligned to that of entrepreneurial owner-backed businesses.
As competition for deals intensifies, it is increasingly important to work out as a Seller exactly what you are looking for and to express that at the outset. That is not easy as different shareholders/management often have differing needs. But time is valuable and PE houses don’t want to be messed around. As a seller, you therefore really need to be properly prepared.
We’ve definitely seen an uptick in overseas buyers in the UK. In fact, they have accounted for 48% of all deals so far in 2020, a record. We see overseas buyers (some of whom are PE backed) often prepared to pay a strategic premium to get into new markets. That can lead to a better valuation and money talks.
Seven out of ICON’s last ten exits have been to overseas buyers, so without doubt, Tech M&A is a very global market, be that a PE backed or trade purchaser.
“Despite COVID-19, it is a very exciting time for Technology M&A with a mix of PE backed and overseas acquirers increasing competition for deals and pushing up valuations. With interest rates looking set to remain low and digitalisation accelerating, this looks set to continue,” said Brian Parker Head of M&A at ICON.
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