Acquirers scramble to capitalise on the surge in technology investment driven by COVID-19

According to Unquote data presented in the Clearwater International Multiples Heatmap, there were a record number of private equity TMT deals in 2020, with the sector proving to be the most active for M&A activity. With more intense competition for technology assets from private equity, the average multiple was also up on 2019. Whilst COVID-19 has had significant societal consequences, the pandemic inadvertently accelerated technology adoption globally. Clearwater International reviews why the technology sector continues to be a shining light in the M&A market.

As the world has adapted to a new normal post the pandemic, funders have seen technology as a safe bet and the key to achieving their desired investment returns. According to a recent survey of 3,000 tech companies by Propel Media, 41% of the technology businesses that participated took on additional funding in 2020, with many having the luxury of an array of investors to choose from. Perhaps unsurprisingly therefore going into 2021; 65% of the businesses they surveyed said that they will start growing their current teams in Q1 and Q2.

Old dog, new tricks

Using new tools for existing workflows has become imperative, even in industries that have been slower to take up technology. For example, many logistics software providers such as Newcastle-based Mandata have benefitted from the fact that key elements such as transport management software systems have turned into operational imperatives as supply chains have become increasingly fragmented and complex which has prompted the acquisition of its competitor Stirling Solutions to capitalise on increasing market demand.

The Government’s commitment to spending 40% of its procurement budget on SMEs offers a real opportunity for smaller innovative players such as social housing specialist Mobysoft which received investment from ECI.

Technology - the key to remote working

Horizontal software focused around key areas such as human resources has also seen a surge in demand, particularly from the SME market. Software solutions that automate simple processes such as payroll and absence management offer low-cost solutions for tasks that have become more complex as people work remotely.

Competition between private equity and trade buyers has pushed multiples up and there have been numerous recent UK HR software deals. For instance, Clearwater International advised Advanced Computer Software on its acquisition of time and attendance specialist Mitrefinch. Other deals include the investment in payroll provider CIPHR by ECI Partners, the acquisition of Staffology by Iris and the purchase of expense management specialist Webexpenses by Elmo.

Whilst a remote workforce gives technology firms a wider geographical pool of employees to target, businesses have faced the challenge of creating a company culture, when new hires probably haven’t even been to the office. Technology that helps improve employee engagement and wellbeing has become an increasing organisational priority, as businesses face the challenge of encouraging teamwork.

Tools such as SmartSurvey which provides surveys that facilitate employee feedback can be cost effective solutions to assess staff sentiment, whilst platforms like Nudge that offer wellbeing solutions on areas such as financial or mental health wellbeing, have seen growth in demand. Equally as communication between employees moves increasingly online, businesses that make this possible have also been strong M&A targets. Microsoft Teams specialist Symity was acquired by Charterhouse in a deal advised on by Clearwater International.

New forms of customer engagement

Technology is not only aiding communication between employees but across stakeholders. For instance, PPC and SEO spend for retail businesses may have dropped in Q2 2020, but as most consumer facing businesses quickly realised they would almost exclusively need to sell online, spending levels recovered in Q3 and Q4. Software products that can maximise return on investment across digital channels has also been in demand. As an example, Clearwater International advised SessionCam a website optimisation specialist on its sale to Glassbox whilst YFM invested in Force 24 a marketing automation platform.

Digital transformation accelerating

Benefits of outsourced IT

Managed service providers such as Littlefish, BCN and DSP have equally seen demand increase. Businesses that were reluctant to outsource their IT, as employees could walk across the office and ask someone, now find that as staff work remotely, specialists that offer a cost-effective solution and have significant flexibility and expertise, are attractive propositions.