Covid-19: A Sledgehammer Blow to Tech M&A – Or is it..?

It’s no exaggeration to say that the arrival of this terrible virus has created unparalleled tragedy and hardship across the globe. And the aftershock continues to reverberate.

Although we are living through an era of unprecedented turbulence and some initial paralysis, caused by Covid-19, it’s clear that globally, businesses have continued to find ways to trade as well as to complete M&A deals.

With any dramatic downturn, there is always an upside. And, in this instance, the tech sector is quite clearly amongst the winners.

Rigorously enforced “stay at home” orders generated a steep increase in the adoption of digital tech, with organisations rushing to buy solutions and hardware to facilitate efficient remote working and collaboration. Even now, with many lockdowns being cautiously lifted, a large proportion of the global working population continues to work from home, at least part of the time.

The Tech Winners

Both Microsoft (Teams) and Zoom have been among the most publicised major winners of this scenario as have Netflix and entertainment streaming generally. But there are many other smaller companies whose ability to quickly pivot to new ways of working, have kept them in business – Witness smaller companies who have changed their business hours to trade with countries coming out of the pandemic. And cyber security companies whose services are in even higher demand now than in a pre-Covid world.

Health tech and sports tech have seen surges, while AI and machine learning, are being harnessed in the fight against Covid-19 and any future pandemics we may face.

Key M&A Drivers in Tech

The technology to achieve remote working at scale has, of course, been available for at least a decade now, but it has taken a global pandemic to unleash its full power & reach.

Last year’s key drivers of M&A activity included AI, IoT, Cloud computing, healthcare, fintech, “Big Data” and robotics. Moving forward to post-Covid 2020, Cloud services will clearly continue to see high demand as people are likely to continue working from home for at least a proportion of the working week.

AI, IoT, healthcare, cyber security solutions & fintech will also be increasingly important as we strive to find remedies to our ills and as we seek to create a new normal; our post-Covid world will be increasingly facilitated by the innovations of a progressively digitally connected world.

Covid-19 has in fact, been responsible for the meteoric rise in digital transformation – Where once companies and institutions wavered, there is now wholesale acceptance that digital is the way forward.

Impact on M&A Transactions

Although M&A deals slowed at the beginning of the pandemic, since May, we have seen signs of robust recovery, with many acquisitions continuing to take place. The Big Tech companies expected to dominate as they strive to acquire new technologies, geographies and talent. (Microsoft  & IBM’s latest acquisitions of ADRM Software & Spanugo respectively, are a good indicator that Big Tech continues to be acquisitive. As is the even more recent acquisition by Amazon of autonomous car start-up, Zoox)

Since Covid hit, some tech companies have seen their fortunes decline; for those owners who now decide to exit, this will mean opportunities for those who remain trading.

There are also entrepreneurs who have taken this time to refine their internal processes, make cost reductions and generally made sure their operations are running efficiently. Having taken stock, some will decide now may be the time to divest certain units that detract from their core offering.

This status quo will inevitably mean there will be some very attractive opportunities for investors to ‘cherry pick’ at competitive prices. In the current circumstances, post-Covid, it will clearly be a buyer’s market, with those companies who have survived the pandemic lockdown in good shape, best placed to take advantage. For deals to move ahead, all parties will need to make realistic appraisals of the current value in a business.

Additionally, Private Equity (PE) firms who haven’t invested over the past three months, have huge funds available and will be keen to find new investments during the remainder of the year. This will offer opportunities for companies to find an investment partner to help them achieve their strategic & financial targets and improve their value in the process.

Sectors Ripe for Investment 

Telemedicine services, FinTech, Healthcare, BioTech, online education (EdTech), e-commerce and Cloud services have positively thrived during the pandemic, with governments calling on tech sector innovators to assist them with their many woes. Tech companies have rushed to assist, creating apps to track & trace the disease, to identify the individuals most at risk and even to collaborate on the fabrication of PPE Visors from 3D printers.

As the threat of Covid gradually recedes, these innovative tech companies have a significant opportunity to drive the transformation of healthcare, education and all other tech-enabled services.

Remote Deal Negotiations

As with all things in a ’Post-Covid World’, the M&A landscape and how deals are both constructed and completed are likely to change substantially.

A practical consideration in structuring deals, is that a majority of the due diligence will need to be undertaken remotely, with discussions around acquisition rationale and even price negotiations also likely performed via Zoom, Teams etc.

We don’t see this as a bar to transactions going ahead, but the logistics of ensuring all interested parties have access to the correct data at the correct stage of negotiations will need careful management, not least because of the highly confidential nature of such information.

Demise of the Photo Opportunity?

On a slightly lighter note, as deals increasingly make use of software that facilitates the e-signing of contracts, It seems likely this new, digitally-enabled era will sound the death knell for traditional images of smiling execs, shaking hands – and possibly also, the post-transaction celebratory drink.

If this is the worst casualty for the new order of M&A transactions, things are indeed looking rosy.