Technology M&A – Wrapping Up 2021 with Momentum

In the past 18 months, the Technology M&A market has navigated the COVID impact with a decline in transactions during the lockdown of the second half of last year, followed by a tremendous reacceleration into the first quarter of this year as transaction volumes jumped almost 4X from Q4 of 2020. We see deal pace accelerating and note how industry participants – from PE firms, to lenders to underwriters of reps and warranty insurance – are striving to keep up.

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This year’s first quarter strength was powered by a surge in smaller transactions with over 500 technology deals – as reported by PWC. In the second quarter, the deal pace receded to 159 transactions but deals were larger in size at nearly $500M on average. We believe the second half of this year will see a pickup in transactions, as estimated in the graph above. Two of the largest vertical markets for M&A continue to be FinTech and HRTech which accounted for nearly 50% of all Technology M&A transactions in the first half of 2021.  Notable 2021 transactions include:

• FinTech – Mega deals like the Intuit pursuit of customer marketing leader Mailchimp for $12B, the Stone Point Capital led $3.75B go-private of property data and analytics firm CoreLogic, and Global Payments $925M acquisition of property management digital solution provider Zego.
• HR Tech – Large deals like Workday’s $700M acquisition of employees success platform Peakon, Ceridian’s $500M acquisition of international payroll provider Ascender,  and Apollo’s $1B acquisition of industrial staffing firm Employbridge.

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In our FinTech and HR Tech practice areas, we note three intensifying forces driving technology mergers:

1. An urgent need to move the growth needle – The larger tech companies are hunting for larger acquisitions, leading start-ups to mash up together for better value.  During normal times the M&A evolution is straightforward: startups hit upon a unique idea, experience explosive growth, cross the chasm of scale and either keep going or get acquired at forward-looking valuations. As an indicator of M&A velocity, we are seeing young technology companies joining forces with other like-minded early-stage firms to get to a meaningful size and breadth because the larger technology acquirers are paying up for growth, provided the acquisition is big enough to have a more immediate financial impact.  
2. Racing towards an uncertain but inevitable new normal – The unnatural distortion caused by COVID has cracked open most business models and created an uncertain end state. Traditionally, technology disrupters uncover an inefficiency or improvement that realigns customers to a better way.  But what if the path to that better way is maddeningly unclear? How do you navigate dislocated supply chains, remote staff and viral variants? One answer is to mash up multiple early technology businesses to better adapt as the next new normal races towards us. In other words, if you are trying to assemble an airplane on the way down, perhaps a combination of two sets of different parts will improve your odds of survival!
3. Taxes – The outlook for potential increases in the capital gains tax on transactions has led to an uptick in transaction volumes as market valuation conditions combined with uncertain tax exposure compelled sellers to enter the market. While the tax specialists we speak with suggest the situation remains very fluid, the recent bill language contemplates retroactive enforcement for any transaction contracted after mid-September 2021. Further, the potential capital gains increase is likely to be less aggressive than originally feared (e.g. only increasing from 20% to 25%, well below the 37%+ levels suggested earlier this year).

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In Summary – We expect to see M&A technology transaction activity pick up momentum through the end of this year and into 2022 as major headwinds begin to recede including COVID and variant uncertainty, clarity around tax changes, inflation, and interest rate outlooks.

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Sources:

• PWC - Technology deals insights: 2021 midyear outlook
• S&P Global – Fintech M&A 2021 deal tracker: Full steam ahead for payments consolidation
• Harbor View Advisors – Inaugural HCM Quarterly Report: Q2 2021

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DISCLAIMER This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.