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The tech sector could see a surge in M&A activity post-pandemic

The tech sector could see a surge in M&A activity post-pandemic

Technology and digital offerings are being prioritised by executives as they look to navigate the current climate and consider investments for growth moving forward

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When it comes to investment and acquisition opportunities, the tech sector looks set to come out on top in the wake of the coronavirus pandemic, according to new research. 

In a study undertaken for the 22nd edition of Ernst & Young’s (EY) Global Capital Confidence Barometer, 72 per cent of global technology respondents indicated they were actively conducting more frequent strategic and portfolio reviews to define capital allocation decisions and drive accelerated recovery.

This could be good news for the tech sector, with EY global transactions technology leader Kenneth Welter noting that technology and digital offerings are being prioritised by executives as they look to navigate the current climate and consider investments for growth moving forward. 

Moreover, despite the recent deterioration of global and sector economic confidence, according to Welter, technology executives are markedly more optimistic about the speed of recovery, with 63 per cent expecting a V-shaped recovery compared with 38 per cent of non-technology respondents.

And while supply chain and working capital challenges have been created for many companies across the technology sector, especially those dealing with hardware and on-premises services, these challenges have been offset to some degree by increased customer usage of online collaborative technology for remote workers, according to Welter.

With this in mind, Welter suggests it should come as no surprise that the sector appears to be more confident in the mergers and acquisitions (M&A) outlook than other sectors, with 70 per cent expecting to see M&A improve in the short term compared with 56 per cent of non-tech respondents.

“Well-capitalised companies are expected to use M&A as a lever to accelerate their recoveries,” Welter said. “Reduced valuations often create opportunities but can also introduce additional risks, particularly around the business resilience of targets. 

“Industry convergence continues to be a trend, likely accelerated by the current crisis as sectors continue to look to technology to fuel growth, potentially increasing competition and challenging valuations.

“Despite the relatively strong posture of the technology sector, significant uncertainty remains. Most companies are focused on stabilising and assessing supply chains, reining in costs and right-sizing workforces in the face of diminishing margins, increased bad debts and lost revenue,” he added.

The potential for the tech sector to host a more vibrant level of M&A activity post-pandemic than other sectors could in fact be doubly beneficial for the technology industry more broadly, along with its stakeholders. 

According to Welter, the 2008-2012 M&A downturn triggered by the Global Financial Crisis (GFC) demonstrated that companies that acted and made decisive investments throughout that period generated superior shareholder returns both during and in the aftermath of the crisis. 

In the immediate future, however, business resilience will be a key factor in evaluating targets. 

“The initial shock of the COVID-19 outbreak has paused and delayed many deals,” Welter said. “However, as executives shift their mindset from crisis management to strategic execution, M&A is expected to be a key lever that well-capitalised companies will use to accelerate recovery.”


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