The technology landscape remains dynamic, characterised by interlocking series of technology innovation and adoption cycles. Cloud-based services such as Dropbox are conducting initial public offerings (IPOs), demonstrating that there is sufficient demand and differentiation for a variety of such enterprise product suites even in the face of competition from incumbents among the vaunted FAANGs (Facebook, Amazon, Apple, Netflix, Google). That is primarily due to adoption cycles, as early enterprise adopters built around innovative product suites accessed via subscription models were able to gain footing even as incumbent giants like Microsoft were slower to react. However, such cycles do tend to overlap eventually and produce frontrunners, leading to consolidation and turnover even at the upper heights of the market.
Consequently, technology deal-making remains more resilient than activity seen in other sectors. Swifter product life cycles, still-high equity markets and relatively cheap debt continue to encourage consolidation among strategics as well as acquisitions of startups at a decent clip. Meanwhile, financial sponsors are still avidly pursuing middle market software companies, lured by the promise of recurring revenues based on models with low operating costs. Purchase prices remain high, however, contributing to decelerating transactional volume over the past few quarters. Looking forward, however, acquisitive interest remains keen enough that the mergers and acquisitions (M&A) cycle appears primed to remain resilient.
The narrative of synchronised global growth remains intact, although there are some troubling signs, given macrofinancial trends among sovereign debt loads and contentious political topics such as trade. The technology industry has benefited considerably from easy monetary policies and the rise of equities, both of which fuelled M&A to a strong degree. At the same time, tech's especially resilient M&A cycle is more indicative of how multiple sectors are expanding or adapting their exposure to relevant technologies.
Accordingly, the technology industry looks set to enjoy considerable M&A levels throughout the rest of this year. Moreover, the industry itself will continue to see transformation as labour markets diversify, more niche market opportunities emerge due to increasing automation, and political headwinds engulf the primary tech monoliths such as Facebook and Google. It is unlikely that monopolistic positions in key markets will shift much over the next few years, despite the aforementioned headwinds, so there will still be significant consolidation, particularly in the middle market, as larger acquirers scoop up start-ups and smaller companies and owners look to take advantage of fairly strong selling conditions as they persist. For private equity (PE) buyers, beginning to consolidate platforms and also still trading up the value chain, so to speak, by buying other PE-backed companies, will remain key strategies.