The tech M&A landscape is shifting to a buyer’s market in 2023. With lower valuations, reduced competition for deals, and an abundance of attractive growth assets available, cash-rich corporations are well-positioned to capitalise on these opportunities through strategic acquisitions. Despite the increasingly favourable conditions for buyers, prospective acquisition targets should be encouraged by the rebound of multiples from the recessionary lows of 2022. The market is also seeing a more robust volume of mid-market deals as companies pursue their strategic objectives. Earlier this year, the market witnessed Edenred’s acquisition of Reward Gateway for $1.15bn at a 20x EBITDA multiple[1] and NASDAQ’s acquisition of Adenza for $10.5bn at an 18x EBITDA multiple[2]. However, targets must brace for heightened scrutiny from potential buyers. They will need to work to strategically position their company, attract the right buyers, and maximise their unique strengths to secure premium valuations.

Key strategies to achieve high-multiples

Today’s sellers must navigate a more challenging M&A environment that requires diligent planning and implementing the right strategies to achieve high multiples. General strategies for achieving high multiples can be applied across different scenarios regardless of revenue level or sector. These strategies include a target positioning to broaden the acquirer’s customer demographic or facilitate their entry into niche markets, establishing a dominant presence as the exclusive player in a specific industry and executing corporate marketing initiatives to increase visibility. Altogether, targets can also benefit in a larger market by tapping into their unique strengths and being strategically positioned against more established competitors; communicating the strategy adds value if targets are credible in doing so. However, strategies for attaining high transaction multiples vary significantly between pre-revenue or minimally revenue-generating pure-tech firms and well-established, revenue-stable companies operating in broader tech sectors.

Pure-tech Acquisitions: for companies valued for their tech, with minimal revenues

Protecting hard-to-replicate technology

One of the most effective ways deep tech companies can boost their valuation is by protecting their technology with patents. Patents are invaluable assets that establish a legal monopoly around a company’s technology, signalling to investors and potential acquirers that it is exclusive and defensible. The closer a deep tech company is to commercialise its technology, the higher its valuation potential. Investors and acquirers are more inclined to pay a premium for technologies on the verge of market launch, as the risk of failure is lower.

Having a strong reputation within the sector

The deep tech ecosystem is characterised by novel and innovative technologies, with players often operating in specialised, narrow niches and forming close-knit networks of experts. A management team with a proven track record and expertise in the field is essential to secure premium multiples as they lend credibility to the company’s technology and typically have established relationships and connections within the industry. Actively participating in the deep tech ecosystem by attending industry events, publishing research papers, and promoting such efforts also helps to raise a company’s profile and visibility among potential investors and acquirers.

Positioning to turn customers into acquirers

Customers who rely on a target company’s technology are more likely to make significant investments in that company. Target companies can capitalise on this dynamic by expanding into sectors where potential acquirers are active and proactively aligning their direction with the acquirer’s vision.

Customers turned acquirers are more likely to pay top dollar if they can rapidly access the desired technology by acquiring the target company, as this circumvents the challenges of assembling an expert tech team and in-house development. Databricks’ acquisition of Mosaic, an OpenAI competitor, exemplifies this. Databrick paid $1.3 billion or the equivalent of around $21 million per employee to acquire the company in June of this year.[3] Customers as acquirers are also motivated by the desire to avoid ongoing royalty payments and safeguarding exclusive access to a technology to prevent rival companies from obtaining it.

Showcasing sales momentum, pipeline analysis, and synergy

Deep tech companies that demonstrate substantiated sales and revenue growth projections based on meaningful conversations and commitments with customers can significantly enhance their valuations. Investors are far more likely to be interested in a company with a clear path for generating future revenue, even if it has yet to materialise. Providing a clear and transparent overview of the sales pipeline, showcasing prospective deals and partnerships in progress, demonstrates growth potential and market traction, which are highly attractive to investors.

Synergistic Acquisitions: for companies valued for their complementary commercial features

Imminent competitive threat to the acquirer

When targets are strategically positioned within the same technological niche and pose a credible threat to the acquirer, they are often willing to pay a premium to neutralise this competitive risk. A prime example is Adobe‘s ongoing acquisition of Figma for $20 billion on a 50x EV/2022 ARR multiple with a massive retention package of $2.3 billion to retain management.[4]

Adobe’s motivation stemmed from Figma’s emergence as a formidable competitor, specifically in design collaboration. Figma offered an all-in-one design solution focused on collaboration, posing a “terminal risk” to Adobe’s market position. By acquiring Figma, Adobe eliminated a competitive threat and added collaboration features to the design workflow, helping the company to capitalise on the industry’s shift toward real-time design collaboration among designers and unlock new customers seeking that functionality.

Establishing commercial relationships with the acquirer

Commercial relationships with a potential acquirer can boost the chances of a successful acquisition. The first step is identifying desirable acquirers and internal champions within these counterparties and making deliberate “inroads” with them. Once a handful of potential acquirers have been narrowed down, target companies can reinforce competitive tension via corporate marketing and provide them with a detailed synergies analysis.

Qualcomm‘s acquisition of Skyhook, a location-based positioning SaaS company, epitomises how a well-nurtured commercial relationship can lead to a premium valuation. Prior to the purchase, Qualcomm had partnered with Skyhook to use the company’s WiFi LBS technology for over a decade.[5] The partnership laid the foundation for a robust commercial relationship and showcased the mutual benefits of integrating Skyhook’s technology into Qualcomm’s offerings. This strategic alignment, nurtured over the years, culminated in Qualcomm’s acquisition of Skyhook for $179 million, reflecting a transaction multiple of 30x LTM (Last Twelve Months) Revenue.[6]

Timing of intent to sell

The ideal timing for target companies to sell is when multiple acquirers are already vetting them rather than when targets perform outreach to seek potential buyers. This shows there is already a demand for a company, which can drive up the price.

From a financial perspective, the timing of when a company should consider going to market for a sale hinges on its revenue status. For companies in the pre-revenue stage, it is prudent to highlight the intrinsic value of their intellectual property. In such cases, it makes strategic sense to initiate the selling process. However, for companies with minimal revenues, caution should prevail. Going to market at this juncture risks attaching a low valuation multiple to the modest revenue figures achieved. Waiting until revenues reach a level of commercial significance materially enhances the prospects of securing a higher valuation, thus maximising the potential return on the sale.

Companies are bought, not sold

In the dynamic landscape of tech mergers and acquisitions, one timeless adage remains resoundingly clear: companies are bought, not sold.

For deep tech companies navigating the path from pre-revenue to commercialisation, raising successive rounds of funding can become increasingly challenging. As a result, acquisition often proves to be the most favourable exit strategy. However, acquirers aren’t about merely tacking on multiples to financials but assessing the use cases of their unique technology and ascertaining a fair price, ensuring the positive impacts compounded over a 5-10-year horizon. Acquisition by a corporate entity can provide the ideal platform for a target company’s technology to reach its full commercial potential and kickstart or exponentially accelerate sales.

Similarly, growing tech companies with stable revenues need to craft a compelling narrative to render them irresistible to potential acquirers. They can leverage their unique strengths to secure premium valuations, whether that’s by becoming a competitive threat or through establishing strong commercial relationships.

Ultimately, the message remains clear. Success in the tech M&A world comes to those who understand that the best way to sell is not to sell at all. It’s about being so appealing, strategically aligned, and valuable that potential acquirers can’t resist making an offer.

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