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Executing Effective M&A in the Technology Sector

Rich Martin, Senior Director, Merrill Corporation | October 27, 2017

Recently, I moderated a panel discussing the Technology sector and the M&A opportunity that arise as companies adapt to a fast-paced and ever-changing environment. With the advent of cloud computing, we have seen a number of interesting things. To begin, many providers of “legacy” technologies face challenges as they work to adapt to a more agile subscription business model. Secondly, companies not typically considered “tech” have begun to either develop or acquire technology to drive future business. 

This trend is particularly evident today as companies with subscription business models and who utilize technology to improve efficiency and reduce costs offer investors far richer valuation multiples. 

Add to this, the reality that macroeconomic conditions, based on a decade of low interest rates, strong credit markets and cheap debt are favorable. When you mix these factors together – an urgent need to change or adapt the business model, high valuation on recurring revenues, and favorable macroeconomic conditions – many company boards have chosen to pursue funding for acquisitions via an injection of private equity or venture capital money rather than on more traditional public funding mechanisms. 

What Makes a Company a Tech Company? 

How do we define technology companies – and is it an overapplied label that is no longer descriptive? Given that every company leverages technology to create differentiation and not be left behind, does that make every company a tech company? Is an e-commerce solution a tech company? Clearly, the label is a little fuzzy and may not even be meaningful. 

Take the examples of Whole Foods, Macy’s and Amazon. One sells food. The others sell consumer goods online and in physical outlets. However, all must – and do – leverage technology to succeed. If they don’t, they will fail – it’s as simple as that. So, all companies are “technology” companies in that they must leverage technology to ensure the success of their businesses. 

Two Marketplaces Emerge

While investment banks continue their dominance in the larger deal space, interestingly, more than 20% of all PE deals completed in the first quarter of this year involved companies in the IT sector. This is a pace well above the 10%-15% range we’ve seen for most of the last decade. 

A recent example is the announcement that Centerbridge Partners – a mega-sized private equity firm with about $14 billion under management – closed on the $1.35 billion purchase of food-services equipment distributor TriMark USA LLC.  

It also appears to be no longer in vogue for tech founders to exit via IPO - just 5.0% of US venture-backed exits last year happened via IPO, down from a post-financial-crisis high of 11.6%.

Technology Deals Remain the Most Active 

The conversation was set against the backdrop of technology deals remaining the most active M&A sector by volume. Not much has changed in the last 18 months: the top six sectors by deal count are still the top six, although there have been some shifts in rank. High Tech and Consumer Products still hold the #1 and #2 spots respectively. While it is not a shock that the biggest of the big deals are coming out of the Energy sector, it is surprising that Real Estate leads the way with smaller deals. 

By value, the rankings also show little change, the notable shift is Consumer Staples popping into sixth place, displacing Financials from the top six. At $357 billion, Energy deals >$500 million lead the way, tailed not even closely by High Tech's $196 billion. 

The volume and value of technology-driven deals have approached their current heights only once before—in 2000, right before the dot-com collapse. But then, the value of Tech M&A plunged from more than $900 billion to less than $300 billion in 2001, and to less than $100 billion in 2003. 

A Very Different Model 

How is today’s market different from the days of the tech bubble, when a lot of corporate venture funds were established, but then didn’t stick around very long? 

The tech M&A market has, in fact, changed substantially:  back then, internet companies went public or were sold despite having no revenue or even, in many cases, a working business model.    

Today, most companies have market tested, if not fully mature, business models. They generate revenue and – most importantly – are profitable. Even younger startups, which have yet to pass the profitability threshold, have clear business plans and timetables. 

No Sector is Immune 

With the advent of cloud computing, many providers of “legacy” technology face challenges as they work to adapt to a more agile subscription business model while remaining in the public domain. This is especially important today as companies with subscription business models offer investors far richer valuation multiples. 

No sector is immune from technology disruption with incumbent global leaders reinventing themselves as technology players. There has been a shift in thinking by strategic acquirers and their willingness to do M&A across industries. Many have a finely tuned process for acquiring companies in the same industry. But as industries converge, such as is happening today given the impact technology has on all sectors – financial services, healthcare, capital goods, automotive, or even food, consumer and retail – there is a greater need to share experiences and lessons learned from successful “cross-industry” Tech M&A. 


  1. Companies need to figure out how to source tech deals, value them and ultimately integrate them even when the acquirer is not itself a “technology” player. 
  1. Investment banks must continue to adapt to complete “transversal” and cross-industry deals. 
  1. Corporations will continue to use corporate venture funds as a possible way to de-risk their entry into a new industry.

All of this is very encouraging for continued M&A in the Technology sector.  I encourage you to listen the to the full discussion, which can be found in the Executing Effective M&A in Technology webinar.

Richard Martin, The M&A Guy


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