In this third and final video of the series, Ruby Sheera speaks to Alexander Luycx from DC Advisory about the resilience of the tech market over the last 12 months and post-Covid, as well as what to look out for in the future.
Ruby Sheera:
Hello, everybody. I'm here today with Alexander Luycx, who's the Managing Director in the Technology and Software team at DC Advisory in the UK. He has over 15 years’ investment banking experience with particular emphasis on software, hosting and colocation, IT services and networks.
Now I'm sure many of you know, DC Advisory is an international investment bank committed to making a difference. It has 11 Industry focused teams that offer tailored, independent advice on M&A, debt raisings, restructuring, private capital, and access to an unrivalled Asian investment knowledge.
Alexander Luycx:
That's a very nice intro, Ruby, and nice to meet you.
Ruby Sheera:
Nice to meet you too. So we're here to have a chat. A couple of quick questions. I think my very first one that I'd like to start off with is, what do you think the outlook is for the tech market, and what impact do you think the last 12 months have had?
Alexander Luycx:
So software and tech is perhaps one of the only sectors that have proven to be not only resilient, but very, very well performing. So when we look at last year, obviously similar to all other sectors, there was a temporary fallback in activity, but it quickly picked up again. And so we are very bullish about the overall M&A activity in software and tech for 2021.
Ruby Sheera:
Fantastic. Have recent economic pressures had an impact in your view on tech valuations?
Alexander Luycx:
That's a very good question. What we saw last year was towards the end of March, when COVID really hit, obviously all stock markets were impacted, and share prices came down quite substantially.
But then we saw, particularly in software and tech, a quick rebound. Particularly around SaaS businesses, they were trading above their prices pre COVID happening. So we've seen valuations and stock markets being very, very high, to the fact that almost some people are wondering whether or not there's a slight disconnect between the valuations of businesses in the public market, and then what is being fetched privately.
Ruby Sheera:
Leading on from that, what effect do you believe Brexit or other domestic factors such as CGT, will have on deal flow activity in 2021? And, do you see any other micro-climates on the horizon such as CGT or Brexit?
Alexander Luycx:
Brexit was much more an uncertainty going into 2020, than it obviously is going into 2021, because we did achieve an agreement between the UK and the European Union just before Christmas. So as of 2021, we don't really see that impact. Last year, there was a lot of uncertainty so it did impact a little bit. The number of assets coming to the market in the first half of the year, but then we clearly saw towards the second half of the year, a very strong and active deal flow, particularly in Q4. Most funds, most banks were very, very busy. So in summary, we don't see that repeating itself in 2021.
On the CGT side, we do see very clearly that a number of situations are being driven by the perceived change in tax regulation coming. So yes, we are currently working on a number of transactions, of which a timetable has been brought forward to kind of make sure the deal completes by the end of March.
In terms of your question, is there anything else that would have an impact on deal flow? The short answer is there's probably some assets that were earmarked to come to the market last year, were not the top quartile assets, and they will come the moment the overall situation, particularly post COVID has improved.
Ruby Sheera:
Thank you. When we look at the market, we see the changes that have occurred. One of the key questions that a lot of people ask me is, how supportive are the debt and public equity markets of M&A activity in this climate?
Alexander Luycx:
Yeah, so that's a good question, and we should look at both the equity in the debt market. So what you saw last year is obviously when COVID hit in March and April, that saw an impact on the equity markets, but they recovered very quickly.
We saw for example, the IPO of Palantir. Then we saw the biggest software IPO ever, which was Snowflake, which was a huge success. Yes, the share prices have come down since, but these were priced last year. It was a very, very good success for all the investors, so we continue to see appetite in public markets.
Now on the debt side, we observe and we see that debt markets are open. But it is obviously becoming a bit more challenging to get actual debt financing raised, in terms of lenders asking more questions, taking longer to approve. They do, but it all takes a bit longer.
Now, there's a subtle but clear difference in the appetite by commercial banks and credit firms, particularly the credit firms are very active. Banks are a bit more hesitant in providing lending.
Ruby Sheera:
Do you think that'll change?
Alexander Luycx:
It will, but we have to first come out of the entire COVID situation, get to a new norm, go through some delayed wave of impacts that undoubtedly and unfortunately will come. Once we get through that, then likely we'll get to a new norm with the banks.
Ruby Sheera:
Thank you. What do you think are the key objectives of corporate buyers and private equity for making acquisitions?
Alexander Luycx:
On the corporate buyer side, look at last year: Salesforce acquiring Slack, you had SAP acquiring Emarsys, you had all of the larger software businesses making very specific acquisitions around capabilities, very often around project management, communication, technology that helps people be smarter working from home, which obviously is a trend here to stay. So that is something that we have seen, and we'll continue to see.
The second noticeable trend that one sees is that, not all businesses have been performing as strongly as others in this COVID climate. So it does provide an opportunity, for larger, well-capitalised businesses to acquire subscale or slightly struggling businesses to enhance, strengthen their positioning, and reap the benefits of synergies.
On the private equity side, and that is a theme that we have seen, that we continue to see, as obviously there is a gigantic amount of capital that is seeking returns, and software and tech is one of those sectors which understandably are generating the best returns. That's why private equity continues to be very, very interested in deploying capital in that space.
Coming back to one of your questions earlier on, when you asked about what's happening towards valuation and prices – what we do observe based on transactions we've advised on over the last few months, and also situations where you're working on the buy side, top quartile assets are going for very high prices, perhaps even higher than pre COVID, because there's a scarcity premium being paid to those assets.
However, assets, which are positioned as top quartile, but in fact are not, they will struggle. And so that tells you that with a rising tide, all the boats are lifted, it was very easy for any advisor to sell a business pre COVID. But with COVID, notwithstanding that software and tech is very resilient, you have to be really focused on how you position your business, that you do it in the right way to attract the right type of buyers.
Ruby Sheera:
That's a great answer, because it brings me on to my next question, which was going to be: If you could talk freely and off the record to a business owner, what advice would you give them about getting the most out of any M&A activity they enter into?
Alexander Luycx:
So the number one thing that comes to mind is timing. Why do I say that? Getting the timing right of a transaction often makes a difference between able to do a deal or not. What we find is that, we as an advisor can be most effective, and add the most value when we have an interaction and get involved early on, way in advance of the founder / entrepreneur thinking about a transaction.
Because it does allow us to get to know the business very well and understand the trajectory of the revenue and the other financials. On that basis, we can give a much more informed advice on when to go to market. We've seen that consistently, is that founder / entrepreneurs do not always get the timing right. They build a great business, but they need to engage with an advisor earlier, because that's when we can be most effective.
Ruby Sheera:
When do they want to sell the business? When it's good for them I take it, as opposed to when the markets are ready for them?
Alexander Luycx:
It's less to do with the markets; of course the general market conditions need to be right. But you have to look at what is the momentum of the business. If you want to do a deal with private equity, well private equity, like anyone else, wants to see momentum and metrics, which go up. If you've been growing very strongly, but you're starting to plateau, that's not the right time to try to do a deal with PE, you have to do it sooner.
On the corporate side, very often it goes back to one-on-one sell-side banking, which is, you want to make sure that your most logical trade acquires know the business and have heard about it. You rarely get into a situation where you can just call, pick up the phone, and introduce a business and the strategic is going to be interested. So you need to take the time to do that free marketing to make sure that your business is on the radar of trade. Now, most of the times it should be, because if you are perceived as a competitor in the space with a strong proposition, and you're competing against trade, then they should know about you.
Ruby Sheera:
Thank you. Another question I’d like to ask, which was prompted by an earlier answer of yours is: if tech is a strategic enabler in value creation, and it's perceived by many companies as that, then one of the things that I've always wondered is why don't we see more tech businesses acquire larger non-tech businesses and drive this impact?
Alexander Luycx:
No, I actually believe it's the other way around. You see non-tech businesses acquiring technology. Now, why is that? It’s that in many traditional industries, there is a trend to move towards industrial tech, to take the benefits of IoT into account. Many business processes are moving digital into the cloud.
So what we see across a number of sectors, is technology becoming more and more of an enabler. If you look within our own firm, we work closely with business services or industrials, two sectors where you see technology increasingly coming into the equation. Now good examples are businesses like Honeywell, General Electric, and Siemens. These are all large conglomerates, where in a traditional part of that business, tech is playing an increasingly important role. That won't stop, that will only increase because of 5G, because of IoT, because of augmented reality.
Ruby Sheera:
Thank you. Last question. If you're looking at the market, just looking forward into 2022 and 2023, what do you see as being the big trends?
Alexander Luycx:
On the software side, it's around AI. Now AI is a topic that is sometimes controversial. AI is not about replacing existing jobs. AI is about making people much more effective and efficient in what they do – that is really the power of AI.
When, five years ago, you had this concept, or even ten years ago about cloud; cloud is omnipresent. We don't think anymore that an application is run in the cloud. Well, the same applies to AI; AI will be the motor of any software application. But really leveraging that capability of AI, we've only scratched the surface of it.
The second trend is something I referred to a bit earlier, which is around virtual and augmented reality. That is particularly towards the consumer side, but not just the consumer side. We see that continuing to be trend. In many consumer applications, but also industrial processes, it will increasingly become a way of interacting or performing with a product or interacting with an application.
Lastly, it's the omni presence of the mobile internet, which is that the number of devices, mobile devices, will only continue to grow exponentially. And that will open up an ever number of new applications and functionality to people connecting devices, connecting workflows, connecting processes. That is a trend that has started and will continue to happen in the future.
Ruby Sheera:
Thank you very much for your time today.
Alexander Luycx:
Pleasure.
Ruby Sheera:
It's been a great discussion. I really appreciated your thoughts and insights, and until next time.
Alexander Luycx:
Likewise, thank you, Ruby.
Tech & Tech Enabled Practice
Ruby Sheera
rs@draxexecutive.com
