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What’s behind the recent M&A flurry in NZ’s tech sector?

What’s behind the recent M&A flurry in NZ’s tech sector?

There’s something special about local technology players that continues to draw international attention.

Josh Pringle (Chapman Tripp)

Josh Pringle (Chapman Tripp)

Credit: Chapman Tripp

On 5 October it was revealed that US-based enterprise resource planning (ERP) software platform developer Springbrook Software had acquired Napier-based Magiq Software.

In July it was Intergen’s turn to get snapped up, with its Australian parent, systems integrator Empired, entering into an agreement to be acquired by Capgemini for roughly A$233 million.

While Magiq Software’s acquisition may not have been on quite the same scale as the Empired deal, the two purchases are representative of a broader trend sweeping the New Zealand marketplace, with seemingly ever-increasing levels of mergers and acquisitions (M&A) action in the local tech sector.  

And while it might be easy to dismiss such a trend as simply a continuation of an already busy M&A landscape in the local landscape, it really has been ramping up this year – across the entire market, not just IT.

Overall, it is anticipated that 2021 will see a full 20 per cent increase in M&A deals, compared to last year, according to forecasts by local commercial law firm Simpson Grierson, which plays in the M&A space.

According to Josh Pringle, corporate partner at another local law firm, Chapman Tripp, there is definitely a high level of M&A activity across the board at the moment, not just in the tech space.

A big part of the rising trend is the easy capital that organisations can get hold of right now, made possible by historically low interest rates, making debt cheaper.  

“There’s an element of a rising tide lifts all boats,” Pringle told Reseller News. “The general level of activity will be having an impact beyond just sector-based factors. People are going to allocate capital in response to that. There’s a lot of capital out there to be invested.

“There’s a low interest rate environment that has encouraged organisations to pursue returns through acquisition. In terms of NZ and especially the tech sector, the activity is a reflection of the quality of our tech businesses, in particular software-as-a-service (SaaS) and other services in that sector,” he added.

Another factor driving the current surge in M&A activity in the IT sector, and more generally across the board, is that the market is rebounding from a general slowdown on the M&A front in 2020, a result of the uncertainty thrown up by the onset of the global pandemic.  

However, as 2021 rolls on and markets begin to transition into life post-COVID, those deals that had been held back are now being transacted, according to Nick McKay, partner, M&A advisory at KPMG New Zealand.  

“The recent spike [is] the catch-up from the 2020 deals that got put on hold during COVID round one, although a lot of those are now completed, there’s a regional portion of those deals that were delayed and are playing out now,” McKay told Reseller News.  

Other factors may be at play here, too.  

From a business seller point of view, certain sectors have benefitted significantly from COVID-19, especially those that could continue to operate effectively under the country’s COVID-19 alert levels.  

Indeed, many cloud software vendors and associated service providers saw an influx of business following the onset of COVID-19.  

As such, some of the companies that have benefitted from the pandemic have brought forward their exit strategy terms to capitalise on strong capital and earnings.   

Not all companies are actively looking for a big exit. But McKay suggests that some organisations that may not have previously been hunting for a buyer might have changed their tune following the uncertainty resulting from the pandemic.  

“COVID has given business owners a good reminder of equity risk, and often business don’t appreciate equity risk the same way as a buyer,” McKay said. “But the pandemic gave a lot of business owners a good scare in 2020, and so they may diversify their wealth with a full, or partial, sale of the business.”

This is happening across multiple industries and regions, according to McKay. However, there is a technical element that might be setting New Zealand organisations apart from their counterparts in other regions, and this seems to be drawing interest from international buyers.

“We are increasingly surprised about the significance of the number of companies in NZ that have market leading IP [intellectual property] or software that’s driving their business or R&D [research and development] capabilities that are world class,” McKay said, noting that this element extends beyond the IT industry alone.  

“NZ companies have always had to, given our geographic disadvantage, be very focused on the high end in terms of IP and R&D to offset the geographic disadvantage and some of our scale disadvantages, to compete against some of the lower cost markets,” he added. 

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