Total technology industry M&A deals worth $82.77bn were announced in the second quarter of 2019, according to GlobalData.

So far in 2019, global M&A deals have been worth a total of $178.02bn, marking a decrease of 19.7% year on year.

The company tracks real-time data concerning all merger and acquisition, private equity/venture capital and asset transaction activity around the world from thousands of company websites and other reliable sources. Verdict spoke to Carl Bradshaw and Nick Field at top legal adviser Kirkland & Ellis to gain greater insight into the latest trends around M&A in the technology industry.

Rachel Cordery (RC) How does an acquirer define success post-acquisition?

Carl Bradshaw: Big picture goals for a particular acquisition can include acquiring specific technology that will enable the acquirer to capitalise on a particular opportunity, adding a book of customers which the acquirer can then cross-sell other products or services to, gaining synergies by combining businesses in a way that enables certain processes to be rationalised or simply preventing a competitor from doing any of these things and goals such as these provide tangible measures of success for an acquisition, but at a more granular level, an acquirer will often assess how well the target business has integrated onto their platform (or vice versa) in determining whether the full potential of the combined enterprise has been realised.

From a legal perspective, we assess whether there are barriers to integration in the due diligence phase prior to the acquisition being agreed, identifying how key licenses and material contracts will be affected by the deal, whether any employee or third party consents will need to be sought and whether any transitional arrangements with the sellers will be required to bridge the integration gap.

And of course, where problems do arise with a newly-acquired business, an acquirer will quickly turn to its legal advisers to ask how that risk has been allocated between buyer and seller, hoping that it has negotiated a successful remedy even where things haven’t quite gone to plan.

Nick Field: The objectives of acquirers often differ widely from one party to another, and for that reason it is fundamentally important to spend time understanding what matters to each party through an M&A process.  Certain success factors are universal – every acquirer will be very focused on the successful transfer of customer and supplier relationships, and on the retention of key individuals within the business they are buying.

(RC) What advice would you give to start-ups to make themselves more attractive to takeover?

CB: With my legal hat on, I would say owning or having valid and lasting rights to use the technology that is key to their business and operating the business in compliance with laws is a good place to start and they should expect potential suitors to diligence this thoroughly.

For example, is the business processing personal data fairly and lawfully and is it correctly differentiating between its employees and contractors in its treatment of its workforce? If not, the cost of making the business compliant and the tail risk of historic breaches could be significant. Start-ups can further enhance the attractiveness of the business by making sure they have some basic value protections, whether that is in the form of patents and trademarks of their key intellectual property or ensuring their talent is subject to appropriate restrictions so that they cannot start-up in competition overnight. Having your “house in order” makes for a cleaner deal process which should help founders maximise value.

NF: Ultimately, the strength of customer relationships is a primary value of driver of value in M&A across a range of business models and sectors.  This is particularly true as in many market segments we see an increasing focus on recurring revenue models from both strategic acquirers and financial investors.  As starting point to build long-lasting relationships with your customers is usually the quality of the product set it is important to both make a great product and be able to demonstrate high levels of customer satisfaction to potential acquirers.

(RC) What makes a company a target for takeover? 

CB: There are lots of reasons a company may attract suitors but common themes for the hottest assets are their growth potential, predictable and recurring revenues and strategic fit with the acquirer.

It isn’t just high performing businesses that get bought however. At the right price, especially where a change of ownership is tipped to unlock value by, for example, giving the business reinvigorated stewardship or enabling the injection of new capital to fund exciting projects, acquirers will compete against one another to seal the deal.

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(RC) What are the key digital themes driving mergers and acquisitions? Are companies buying in digital expertise to leverage their competitive position?

NF: The theme we are seeing consistently across verticals is increasing availability of data and data analytics as a driver of M&A.  Because the human element of business processes changes relatively slowly, we are now seeing a significant volume of deals involving the business models enabled by the application of technologies like SaaS product delivery and API interfacing that were first implemented a decade ago and are now reaching maturity.  Cutting edge technologies like AI and blockchain are driving some deals which tend to be either smaller acquisitions, or strategic investments which are generally made by global operators seeking an inside track on the application of a potentially disruptive technology to their business.

(RC) How is the broader macro environment affecting both deal volumes and deal values?

CB: On the one hand, the low interest environment and high amounts of cash that major businesses and investment firms are sitting on is capable of sustaining the record levels of M&A that we have seen in recent years.

On the other hand, the geopolitical tensions such as the US-China trade posturing and Brexit, create uncertainty and the recent interest rate cut by the US Federal Reserve signals increasing concerns about a possible softening in the macroeconomic outlook.

Taken together, these factors are likely to mean that most businesses will be hoping for the best while preparing for the worst, taking the time to really get to know a sector or asset so that they can build the conviction required to get a deal done in what remains a competitive and high priced environment. While there may be more caution about expansion in the months to come, the key role that technology plays in the race to stay ahead of the competition is likely to continue to fuel M&A in this sector.

Many of our clients in the Private Equity industry remain determined to invest through the cycle and events such as Brexit are predicted to create unique opportunities for them to deploy capital.

(RC) What trends are you seeing in terms of the types of companies acquiring and being acquired?

CB: In Private Equity in particular, take private and carve-out acquisitions are the order of the day as investors seek more complex deals which are harder to execute in the hope that there will be less competition for the asset and as such, a more achievable price-tag.

Larger enterprises undertaking simplification plans are divesting businesses which are not core to their strategy while Private Equity-backed businesses pursuing a buy-and-build approach in the hunt to deploy capital are offering new homes to these assets.

Foreign acquirers are looking at UK-listed businesses that have an international footprint so that they can take advantage of the weaker pound to buy assets at more attractive valuations without being wholly exposed to the UK market.

NF: Strong support from public and private equity markets, as well as good conditions for debt funding are driving an active M&A market, which generally continues despite short term political uncertainties.  Because of this founders and management teams have a wide range of options in terms of deal structure, and access to capital to drive growth.  As a result we are seeing companies stay in private equity ownership for longer, with secondary, tertiary and even quaternary buyouts becoming relatively common.  The ability to capture a greater proportion of their growth opportunity is causing management teams to think harder about succession planning for a longer period under private equity ownership.

(RC) What advice would you give to an acquired company that wants to maximise the value it gets out of a buyout?

NF: Investing time and resources at the outset to get the senior team and incentives right is fundamentally important, as the execution of growth is often driven by a relatively small number of key people.  Because of the risk inherent in making significant changes to a senior team, successful CEOs are often those who have been most thoughtful and effective in building the team their business will need in the future, rather than a team that is simply ‘fit for purpose’ now.

(RC) What are the biggest challenges facing M&A activity in the sector at the present?

CB: Geopolitical uncertainty aside, the current wave of protectionism, which can be seen in increasing restrictions on foreign direct investment, trade wars, enhanced sanctions and in some cases, obstacles to outbound investment, presents increasing execution risk for cross-border M&A and may to some extent result in the de-globalisation of deal making as buyers pursue more local targets in deals that are easier to predict the outcomes of.

Nevertheless, while there have been some high profile cases, the number of deals falling foul of regulatory intervention remains relatively low and with early advice on the potential issues – thinking through the types of concessions and undertakings parties may have to offer regulators and unions and engaging with key stakeholders – parties continue to be able to get complex cross-border deals across the line.

NF: In a macroeconomic environment of some uncertainty we see a greater focus from acquirers on the characteristics of businesses that provide resilience to future economic shocks.  Whilst engaging thoughtfully with that topic requires a mindset that is less familiar following a period of benign economic conditions, for high quality differentiated business models it is rarely a barrier to a successful deal.

(RC) Is there any other insight which you would like to share for our readers?

CB: We are certainly in some interesting times, just as the unprecedented deal volumes that we have seen in the last few years was starting to feel like the “new normal”.  Many of our private equity clients tell us that if a storm comes they will run for opportunities rather than for cover and given the disruptive force of technology and its capacity to reach across sectors it is difficult to see how tech M&A will not continue to be at the forefront of global deal making.

NF: In a world that has generally become less certain over the last 24 months we have seen something of a flight to quality in the M&A market, with strategic acquirers and investors both focusing greater attention on the highest quality assets, and willing to pay premium valuations for them.

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