Broadly speaking, the story of business in recent years has been the story of digital transformation, with every sector from the powerhouses of banking and finance to the most modest of takeaway restaurants seeking to connect with smartphone-happy customers.
But what does this mean for those businesses already the most digital – the tech sector?
Anya Cummins, partner and head of Deloitte private and M&A Advisory partner, said that the first thing it means is growth.
“Ireland has a very vibrant indigenous technology sector,” she said.
Naturally, many of these businesses, including Fast 50 entrants and laureates, are engaged in helping other businesses with digital transformation.
“Digitisation and connectivity are big themes in Ireland, and these businesses are enabling that transformation,” said Cummins.
Digging down into the detail this means that, in Ireland as elsewhere, technology businesses are proving to be resilient in the current market, typically have high valuation multiples, attract capital and are seeking to expand rapidly. Often this means merger and acquisition (M&A) transactions – with tech businesses raising capital, acquiring businesses, and some exiting over time.
With Deloitte recognised last week as Ireland’s M&A Financial Advisor of the Year 2020 by Mergermarket, Cummins knows a thing or two about M&A.
“The technology businesses that are driving customer and employee connectivity, supporting e-commerce, delivering communications, supporting the pharma and life sciences sectors, providing e-learning capabilities, focusing on energy tech; innovating in the fintech space, and many more sub-sectors in the technology sector – they are all very resilient and attractive right now. They’re looking to scale, using acquisitions to accelerate growth, are raising capital and are, of course, attractive to corporate buyers,” she said.
It’s not just a case of being gobbled up though. Fast 50 entrants are themselves acquiring other businesses as they chart their path to continued growth.
“Shareholders may wish to ultimately exit, but are also themselves consolidating their markets to accelerate growth. Welltel and Arkphire have been acquisitive, for example, as they have scaled their businesses, and there are numerous other examples in the Irish technology sector. I suspect you will see continued acquisition activity in the Fast 50 cohort this year as they grow,” she said.
As with everything else this year, the coronavirus pandemic is an unavoidable fact of life, and while the 2020 Fast 50, being based on 2019 financial returns, does not reflect it, it nonetheless shows areas and individual businesses that are likely to thrive.
Naturally, a number of business sectors have been negatively affected, notably retail, leisure, travel and hospitality. Capital has to flow somewhere, though, and as a result more is flowing into technology.
“Technology has continued to be in general a high growth area,” said Cummins.
This includes businesses that are disrupting sectors that may be challenged at the moment and those that are enabling us all to connect in a digital environment.
“eShopWorld has won the Fast 50 three times in a row and is a fantastic success story for indigenous technology in Ireland. Businesses like that are in a very exciting position and are continuing to scale, generate employment and internationalise,” she said.
Cummins said that continued strong M&A activity in this sector reflects the fact that businesses in the tech sector have always been attractive to investors and strong M&A activity levels and high valuations are likely to persist into 2021.
When it comes to derisking or selling the business in whole or in part, however, private equity investors and potential strategic buyers have different goals. As a result, if shareholders are considering a sale; they need to consider their objectives and design their exit to align with their goals.
“Founders will often have an exit strategy and/or a shareholder – there’s a big difference between a transaction with a private equity partner, who wants to go on that growth journey with the team, or selling to a strategic party in a buyout,” she said.
“Private equity will be looking to invest in a business to double or triple it over a three-to-five-year period and then exit, potentially in a secondary deal to another fund, or via IPO or trade sale. A strategic buyer is buying the business, may integrate that business into its own group and will typically have its own strategic plans which will drive the acquisition strategy,” she said.
In either case, a technology business can attract a lot of capital and investor or buyer interest at premium valuations, particularly in the current market, but to do so they need to be prepared, she said.
“The biggest thing that kills deals is pace. Being able to get a transaction through in a timely manner and drive competitive tension means being ready with a clear business plan, the financial KPIs [key performance indicators] and the level and type of financial information that an investor or buyer will require.”
For Cummins, the increase in M&A activity across the sector is indicative of positive trends.
“It’s exciting and a really good news story: it’s great to be able to celebrate that, this year, of all years, and to recognise fantastic and positive growth,” she said. “We look forward to seeing how these businesses continue to scale; and 2021 will be a really interesting year in this space.”